Portfolio Inertia and Stock Market Fluctuations

This paper uses population‐wide data from the Panel Study of Income Dynamics and the Survey of Consumer Finances to resolve the conflict between overtrading and inactivity shown in administrative data on brokerage and retirement accounts, respectively. Considerable inertia is found and linked to characteristics (e.g., limited education or resources), but less to index movements: the downswing has encouraged staying out, rather than getting out, of the market. The small minority with brokerage accounts exhibits important differences in trading patterns relative to the population and invests small fractions of wealth in brokerage accounts. Results strengthen the case for default options in retirement accounts and built‐in trading provisions in mutual funds.     

Saving and investing for early retirement: A theoretical analysis

We study optimal consumption and portfolio choice in a framework where investors adjust their labor supply through an irreversible choice of their retirement time. We show that investing for early retirement tends to increase savings and reduce an agent's effective relative risk aversion, thus increasing her stock market exposure. Contrary to common intuition, an investor might find it optimal to increase the proportion of financial wealth held in stocks as she ages and accumulates assets, even when her income and the investment opportunity set are constant. The model predicts a decrease in risk aversion following strong market gains like those observed in the nineties.     

Endogenous Life‐Cycle Housing Investment and Portfolio Allocation

This paper develops a life‐cycle portfolio allocation model to address the effects of housing investment on the portfolio allocation of households. The model employs a comprehensive housing investment structure, Epstein–Zin recursive preferences, and a stock market entry cost. Furthermore, rather than resorting to calibration we estimate the value of the relative risk aversion and elasticity of intertemporal substitution. The model shows that housing investment has a strong crowding out effect on investment in risky assets throughout the life‐cycle. We further find that the effect of the presence of housing investment on households portfolio allocation is larger than the effect of having EZ recursive preferences.     

Optimal retirement with unemployment risks

This paper investigates the optimal retirement of an individual in the presence of involuntary unemployment risks and borrowing constraints in a complete market with frictions. We use an intensity model and loading factors to illustrate the involuntary unemployment risks and frictions in unemployment insurance markets. Using reasonably calibrated parameters, we observe that high involuntary unemployment intensity and loading factors could be important explanations for the empirical findings emphasized in recent studies. We also find that an individual with high leisure demand after retirement reduces consumption during retirement and increases stockholdings as retirement time approaches.     

Institutional Investors and the QE Portfolio Balance Channel

The operation of the portfolio balance channel has been emphasized by monetary policymakers as a key channel through which quantitative easing (QE) policies work. We assess whether the investment behavior of insurance companies and pension funds in the United Kingdom during the global financial crisis was consistent with such an effect by analyzing both sectoral and institution‐level data. Our results suggest QE led to institutional investors shifting their portfolios away from government bonds toward corporate bonds but did not lead to a shift into equities.     

Marriage and other risky assets: A portfolio approach

We study the joint impact of gender and marital status on financial investments by testing the hypothesis that marriage represents – in a portfolio framework – a sort of safe asset and that this attribute may change over time. We show that married individuals have a higher propensity to invest in risky assets than single ones, that this marital status gap is stronger for women and that, for women only, it evolves and declines at the end of the sample period. Next we explore a number of possible explanations of the observed gender differences by controlling for background factors that capture the evolution of family and society. We find that both the higher female marital status gap and its time variability vanish for those women who are employed. Our empirical investigation is based on a dataset drawn from the 1993–2006 Bank of Italy Survey of Household Income and Wealth.     

Age‐Dependent Increasing Risk Aversion and the Equity Premium Puzzle

We introduce a new preference structure—age‐dependent increasing risk aversion (IRA)—in a three‐period overlapping generations model with borrowing constraints, and examine the behavior of equity premium in this framework. We find that IRA preferences generate results that are more consistent with U.S. data for the equity premium, level of savings and portfolio shares, without assuming unreasonable levels of risk aversion. We find that the relative difference between the two risk aversions (how much more risk‐averse old agents are relative to the middle‐aged) matters more than the average risk aversion in the economy (how much more risk‐averse both cohorts are). Our findings are robust with respect to a number of model generalizations.     

Long‐Run Consumption Risk and Asset Allocation under Recursive Utility and Rational Inattention

We study the portfolio decision of a household with limited information‐processing capacity (rational inattention [RI]) in a setting with recursive utility. We find that RI combined with a preference for early resolution of uncertainty could lead to a significant drop in the share of portfolios held in risky assets, even when the departure from the standard expected utility setting with full‐information rational expectations is small. In addition, we show that the equilibrium equity premium increases with the degree of inattention because inattentive investors with recursive utility face greater long‐run risk and thus require higher compensation in equilibrium.     

High‐Cost Credit and Consumption Smoothing

In this paper, I show that high‐cost credit helps households smooth consumption following periods of temporary financial distress. After experiencing distress—that is, extreme weather events—I find that access to high‐cost payday lending mitigates declines in overall spending and nondurable goods spending generally. The results are particularly concentrated among households with a higher propensity to use payday credit or that have limited alternatives: lower income households, households with less than a college degree, and households with low levels of saving. These results highlight the consumption‐smoothing role that high‐cost credit plays for households with limited access to other types of credit.     

Mortgage Choice in the Euro Area: Macroeconomic Determinants and the Effect of Monetary Policy on Debt Burdens

This paper provides novel evidence on the role of the macroeconomic environment for households’ choice between fixed‐interest‐rate and adjustable‐interest‐rate mortgages (ARMs) in the euro area. We find that relatively more ARMs are taken out when economic growth is strong, the interest rate spread is high, or unemployment shows low volatility. A simulation exercise shows that a reduction in mortgage rates as witnessed during the monetary easing in the course of the global financial crisis produces a substantial decline in debt burdens among mortgage‐holding households, especially in countries where households have higher debt burdens and a larger share of ARMs.