Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM
Sheraton Grand Chicago, Missouri
- Chair: Francisco Gomes, London Business School
On the Asset Allocation of a Default Pension Fund
AbstractWe characterize the optimal default fund in a defined contribution (DC) pension plan. Using detailed data on individuals and their holdings inside and outside the pension system, we find substantial heterogeneity among default investors in terms of labor income, financial wealth, and stock market participation. We build a life-cycle consumption-savings model incorporating a DC pension account and realistic investor heterogeneity. We examine the optimal asset allocation for different realized equity returns and investors and compare it with age-based investing. The optimal asset allocation leads to less inequality in pensions while it moderates the risks through active rebalancing.
Information Aggregation and Asset Prices in Large Markets With Institutional Investors
AbstractWe study the joint determination of endogenous information acquisition and equilibrium asset prices in a rational expectation equilibrium model with a continuum of asset managers who care about their performance relative to a benchmark and have CRRA preferences. In the presence of benchmarking, managers are less willing to deviate from the benchmark and, thus, to speculate based on private information, such that less of a manager’s private information gets incorporated into prices. As benchmarking also reduces the fraction of managers that endogenously decide to acquire private information, prices are substantially less informative in the presence of institutional investors. The benchmark asset is therefore perceived to be more risky, leading to a decline in price, which can dominate the positive price effect stemming from the managers’ excess demand due to index-hedging, and a substantial increase in return volatility.
University of Texas-Austin and NBER
- G1 - Asset Markets and Pricing