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The Choice Channel of Financial Innovation

  • Felipe S. Iachan
  • Plamen T. Nenov
  • Alp Simsek
American Economic Journal: Macroeconomics
vol. 13, no. 2, April 2021
(pp. 333-72)
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Abstract

Financial innovation in recent decades has expanded portfolio choice. We investigate how greater choice affects investors' savings and asset returns. We establish a choice channel by which greater portfolio choice increases investors' savings—by enabling them to earn the aggregate risk premium or take speculative positions. In equilibrium, portfolio customization (access to risky assets beyond the market portfolio) reduces the risk-free rate. Participation (access to the market portfolio) reduces the risk premium but typically increases the risk-free rate. Empirically, stock market participants in the United States save more than nonparticipants and have increasingly dispersed portfolio returns, consistent with the choice channel.

Citation

Iachan, Felipe S., Plamen T. Nenov, and Alp Simsek. 2021. "The Choice Channel of Financial Innovation." American Economic Journal: Macroeconomics, 13 (2): 333-72. DOI: 10.1257/mac.20180429

Additional Materials

JEL Classification

  • E21 Macroeconomics: Consumption; Saving; Wealth
  • G11 Portfolio Choice; Investment Decisions
  • G12 Equities; Fixed Income Securities
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
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