A multiplier approach to understanding the macro implications of household finance (original) (raw)

MACRO IMPLICATIONS OF HOUSEHOLD FINANCE Preliminary and Incomplete

2007

Abstract Our paper examines the impact of heterogeneous trading opportunities on the distribution of asset shares and wealth in an equilibrium model. We distinguish between “passive” traders who hold fixed portfolios of equity and bonds, and “active” traders who adjust their portfolios to changes in the investment opportunity set.

An empirical analysis of aggregate household portfolios

Journal of Banking & Finance, 2008

This paper analyzes the important time variation in US aggregate household portfolios. To do so, we first use flexible descriptions of preferences and investment opportunities to derive household optimal decision rules that nest static, myopic, and non-myopic portfolio allocations. We then compare these rules to the data through formal statistical analysis. Our main results reveal that: (i) static and myopic investment behaviors are rejected, (ii) non-myopic portfolio allocations are supported, and (iii) the Fama-French factors best explain empirical portfolio shares.

Are Household Portfolios Efficient? An Analysis Conditional on Housing

Journal of Financial and Quantitative Analysis, 2003

In this paper we argue that standard tests of portfolio efficiency are biased because they neglect the existence of illiquid wealth. In the case of household portfolios, the most important illiquid asset is housing: if housing stock adjustments are costly and therefore infrequent, we show how the dynamic optimization problem produces optimal portfolios in periods of no adjustment that are affected by housing price risk (through a hedge term). When the housing stock is not adjusted, we argue that tests for portfolio efficiency of financial assets must then be run conditionally upon housing wealth. In our application, we use Italian household portfolio data from SHIW 1998 and time series data on financial asset and housing stock returns to assess whether actual portfolios are efficient. We first consider purely financial portfolios and portfolios that also treat the housing stock as another asset. We then consider the consequences of treating the housing stock as given and test for efficiency in this framework. Our empirical results support the view that the presence of housing wealth plays an important role in determining whether portfolios chosen by home-owners are efficient.

Diversification or Concentration? An Empirical Analysis of Household Portfolio Allocation Practices

1998

This article finds that well-diversified portfolios are rare among households owning discretionary financial assets. Most households typically concentrate their portfolios in a single asset class. In 1995, two thirds had average allocations over 90% in constant dollar instruments, while 15% had portfolios dominated by a risky category. After controlling for other variables, differences were found in risk tolerance, shopping behavior, interest rate expectations, and investment goals between groups of households with dissimilar portfolio types. Financial advisors might use this information to develop educational strategies best suited for various portfolio orientations.

Households' portfolio diversification

2010

Presentazione: This paper performs an efficiency analysis of households portfolios based on the comparison of observed portfolios with the mean-variance frontier of assets returns. Data on household portfolios are drawn from a representative sample of the Italian population with at least a bank account.

Short-run variations in households' financial market expectations

Despite its importance for the analysis of life-cycle behavior and, in particular, retirement planning, stock ownership by private households is poorly understood. Among other approaches to investigate these puzzles, recent research has started to elicit private households' expectations of stock market returns. This paper reports on findings from a study that repeatedly collected data both on households' financial markets expectations (subjective probabilities of gains or losses) and on their portfolio choices (i.e., actual trades) over a half-year period at relatively short intervals of a few weeks. We document substantial heterogeneity in financial market expectations. Expectations are correlated with various measures of portfolio choice and trading behaviour; generally, those who have higher income, a larger share of risky assets, and trade more often are more optimistic about the stock market. There is also some evidence that households' subjective stock market expec...

How Does Households' Wealth Affect Portfolio Choices?

EUROPEAN RESEARCH STUDIES JOURNAL, 2020

The aim of this paper is to identify the determinants of households' preferences regarding financial asset allocation. It investigates the structures of households' financial asset portfolios in 15 euro area countries. It assumes three risk classes and presents a comprehensive picture of an average portfolio at the domestic and euro area levels. Methodology: The research is based on the Eurosystem HFCS data. It applies the fractional multinomial logit model which allows analysing parallel movements in all shares of portfolio components resulting from the changes in households' wealth. Findings: The results obtained allow drawing conclusions about the heterogeneity of households' investment preferences on the financial markets across the euro area. However, in all analysed member countries, deposits can be perceived as a component of primary importance as well as a substitute to voluntary pension plans and whole life insurance contracts. The results from the fractional multinomial logit model lead to a general finding that wealthier households are more open to risk exposure than those less affluent. The most useful wealth measures regarding the aim of the study were net wealth, total financial assets, and annual gross incomes. Their adoption to the model allowed identifying the countries like France, Finland, or Italy where the effect of the deepening changes in portfolio structure caused by the continuous increase in households' wealth was identified. Additionally, Austria, Finland, France, and Italy were recognised as the member states of the most significant differences in this regard between the most distant classes of households-the poorest and the most affluent. Practical implications: This study allows crosscountry comparison of the investment preferences of the households characterised by similar financial standing. The results obtained are relevant to the discussion on households' portfolio choices, and growth potentials of the retail financial market in the euro area. Originality/Value: The main contribution of this study to the literature is the knowledge on how the differentiated wealth of the euro area households influences the risk profiles of their financial asset portfolios.

Asset Pricing with Heterogeneous Consumers

Journal of Political Economy, 1996

Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks. Given the joint process of arbitrage-free asset prices, dividends, and aggregate income, satisfying a certain joint restriction, it is shown that this process is supported in the equilibrium of an economy with judiciously modeled income heterogeneity. The Euler equations of consumption in a representative-agent economy are replaced by a set of Euler equations that depend not only on the per capita consumption growth but also on the cross-sectional variance of the individual consumers' consumption growth. Constantinides acknowledges support from a gift to the Graduate School of Business, University of Chicago, by Dimensional Fund Advisors. Duffie acknowledges support from the National Science Foundation under grant SES 90-10062 and from Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 303 as well as the Gottfried-Wilhelm-Leibniz-Forderpreis. We are grateful for comments from John Cochrane,

Wealth and portfolio composition: Theory and evidence

Journal of Public Economics, 1998

We examine a survey of 6010 U.S. households and estimate a model for household portfolio allocation. We extend the conventional portfolio choice model in order to capture the observed incompleteness of household portfolios. We show that the empirical specification of the joint discrete and continuous choice that characterizes household portfolio behavior is a switching regressions model with endogenous switching. We go on to examine the impact of taxes on portfolio composition, using detailed survey data to calculate precisely the marginal tax rate facing each household. Finally, we estimate wealth elasticities of demand for a range of assets and liabilities.

Households’ Portfolio Diversification

This paper performs an efficiency analysis of households portfolios based on the comparison of observed portfolios with the mean-variance frontier of assets returns. Data on household portfolios are drawn from the 2001 Centro Einaudi survey, a representative sample of the Italian population with at least a bank account. We find that most households’ portfolios are extremely close to the efficient frontier once we explicitly take into account no short-selling constraints, while the null hypothesis of efficiency is rejected for all portfolios if we don’t consider these constraints.