Modelling Household Debt and Financial Assets: A Bayesian Approach to a Bivariate Two-Part Model

Li Su, Sarah Brown, Pulak Ghosh, and Karl Taylor

Abstract

In this paper, we contribute to the empirical literature on household finances by introducing a Bayesian bivariate two-part model. With correlated random eff ects, the proposed approach allows for the potential interdependence between the holding of assets and debt at the household level and also encompasses a two-part process to allow for di fferences in the influences of the independent variables on the decision to hold debt or assets and the influences of the independent variables on the amount of debt or assets held. Finally, we also incorporate joint modelling of household size into the framework to allow for the fact that the debt and asset information is collected at the household level and hence household size may be strongly correlated with household debt and assets. Our fi ndings endorse our joint modelling approach and, furthermore, confi rm that certain explanatory variables exert di fferent influences on the binary and continuous parts of the model.