Asset Pricing: Portfolio Choice and Asset Allocation
Paper Session
Saturday, Jan. 6, 2024 2:30 PM - 4:30 PM (CST)
- Chair: Nikolai Roussanov, University of Pennsylvania
Asset Demand of U.S. Households
Abstract
We use new monthly security-level data on portfolio holdings, flows, and returns of U.S. households to understand asset demand across multiple asset classes. Our data cover a wide range of households across the wealth distribution – including ultra-high-net-worth (UHNW) households – and holdings in many asset classes, including public and private assets. We first develop a descriptive model to summarize households’ rebalancing behavior. We find that less wealthy households rebalance from liquid risky assets to cash during market downturns, while UHNW households tend to purchase risky assets during those periods and thus stabilize market fluctuations. This pattern is particularly pronounced for U.S. equities. Across risky asset classes, three factors explain most of the variation in portfolio rebalancing and those factors target the long-term equity premium, the credit premium, and the premium on municipal bonds. Next, we develop a new framework to estimate demand curves across asset classes. While nesting traditional models as a special case, our framework allows for a muted response of asset demand to fluctuations in asset prices and easily extends to account for inertia. Our new estimator of asset demand curves exploits variation in second moments of returns and portfolio rebalancing, and can even be used when only a fraction of all holdings in a market can be observed. Our preliminary results indicate that asset demand elasticities are smaller than those implied by standard theories, vary significantly across the wealth distribution, and are negative for various groups, pointing to positive feedback trading. In sum, we think that our framework and data paint a coherent picture of U.S. households that captures, quite uniquely, their rebalancing behavior across the wealth distribution and across broad asset classes.Financial Windfalls, Portfolio Allocations, and Risk Preferences
Abstract
We investigate the impact of financial windfalls on household portfolio choices and risk exposure. Exploiting the randomized assignment of lottery prizes in three Swedish lotteries, we find a windfall gain of $100K leads to a 5-percentage-point decrease in the risky share of household portfolios. We show theoretically that negative wealth effects are consistent with both constant and decreasing relative risk aversion and analyze how our empirical estimates help distinguish between competing models of portfolio choice. We further show our results are quantitatively aligned with the predictions of a calibrated dynamic portfolio choice model with nontradable human capital and consumption habits.Wealth Dynamics and Financial Market Power
Abstract
We propose a dynamic theory of financial market power in settings where some investors trade strategically because of price impact. The distribution of risk and wealth determines market power, and wealth evolves over time given strategic portfolio choices. Distortions from market power are increasing in gains from trade, and therefore counter-cyclical. In equilibrium, the largest investors remain under-diversified to capture rents, generating concentration and volatility in the wealth distribution. Conversely, wealth concentration leads to inflated asset prices, unequal returns to wealth, and poor liquidity that further exacerbates the distortions from market power. We discuss several applications of our framework.Discussant(s)
Philipp Illeditsch
,
Texas A&M University
Valentin Haddad
,
University of California-Los Angeles
Sylvain Catherine
,
University of Pennsylvania
Matthieu Gomez
,
Columbia University
JEL Classifications
- G1 - General Financial Markets