Did perceptions of background risk change over the Great Recession?

Based on a theory of portfolio choice with non-tradable assets, we estimate perceived background risks immediately before and after the Great Recession from a large representative panel survey of U.S. households. Background risks related to human capital, residential property and proprietary business all reduce risk-taking, but these effects decline over the Great Recession. These declines are driven by perceptions of increased stock market risk rather than changes in covariances between returns on non-tradable assets and stocks. Perceptions of risk-adjusted stock market performance remained unchanged. Our results help to explain why household stock market participation rose following the Great Recession