Ratchet vs Blasé Investors and Asset Markets

His paper proposes a new wealth-dependent utility function for the inter-temporal consumption and portfolio problem, in which the subsistance (bliss) consumption level is a function of wealth. Ratchet effects obtain when higher wealth increases the subsistance consumption level; blasé behavior occurs when higher wealth reduces it. We have three contributions: (i) we identify closed-form solutions for optimal consumption and portfolio rules; (ii) we use the optimal rules to estimate the model using aggregate portfolio data, and (iii) we derive and discuss the pricing implications of our results. Our estimates are consistent with blasé behavior and counter-cyclical risk aversion. Cet article propose une nouvelle fonction d'utilité contingente à la richesse pour le problème de la consommation et de portefeuille inter-temporels, où le niveau de subsistance (félicité) de la consommation dépend de la richesse. Des effets de rochet sont obtenus lorsque la richesse accroît le niveau de félicité, des effets blasés lorsqu'elle le réduit. Nous présentons trois contributions : (i) nous identifions des formes réduites pour la consommation et les portefeuilles optimaux; (ii) nous utilisons ces règles pour estimer le modèle à partir de la consommation et des positions financières agrégées et (iii) nous dérivons et discutons des implications de valorisation des actifs. Nos résultats indiquent la présence d'effet blasé et d'aversion contra-cyclique.portfolio choice, wealth-dependent preferences, preference for status, asset pricing, equity premium, risk-free rate, predictability, choix de portefeuille, préférences contingentes à la richesse, préférence pour le statut social, valorisation des actifs, prime de risque, taux sans risque, prévisibilité

Benchmarks in Aggregate Household Portfolios

Reference-dependent preference models assume that agents derive utility from deviations of consumption from benchmark levels, rather than from consumption levels. These references can be either backward-looking (as explicit in the Habit literature) or forward-looking (as implicitly suggested by Prospect Theory). For both cases, we specify and estimate a fully structural multi-variate Brownian system in optimal consumption, portfolio and wealth using aggregate household financial and real estate wealth data. Our results reveal that references are (i) strongly relevant, (ii) state-dependent, and (iii) that the data is more consistent with the backward- than the forward-looking reference model.portfolio choice; reference-dependent utility; habit; prospect; estimation of diffusion processes

Recursive Measures of Total Wealth and Portfolio Return

This letter presents and assesses a procedure to generate recursive measures of aggregate total wealth and portfolio return. Conceptually, the procedure is more flexible than the classical replacement cost and present value methods. Empirically, the procedure yields recursive measures that appear more realistic than those obtained from the classical methods.Financial, human, and tangible assets; present value and replacement cost methods

An Empirical Analysis of U.S. Aggregate Portfolio Allocations

This paper analyzes the important time variation in U.S. aggregate portfolio allocations. To do so, we first use flexible descriptions of preferences and investment opportunities to derive optimal decision rules that nest tactical, myopic, and strategic portfolio allocations. We then compare these rules to the data through formal statistical analysis. Our main results reveal that i) purely tactical and myopic investment behaviors are unambiguously rejected, ii) strategic portfolio allocations are strongly supported, and iii) the Fama-French factors best explain empirical portfolio shares.portfolio; factorial pricing; dynamic hedging

Asset Returns and State-Dependent Risk Preferences

We propose a consumption-based capital asset pricing model in which the representative agent's preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functional form linking risk aversion with state variables. Our estimates are based on Markov chain Monte Carlo estimation of exact discrete-time parameterizations for linear diffusion processes. Since consumption risk is not forced to account for the entire risk premium, our results contrast sharply with estimates from models in which risk aversion is state-independent. We find that relaxing fixed risk preferences yields estimates for relative risk aversion that are (i) reasonable by usual standards, (ii) correlated with both consumption and returns and (iii) indicative of an additional preference risk of holding the asests.Asset pricing models, Bayesian analysis, continuous-time econometric models, data augmentation, equity premium puzzle, Markov chain Monte Carlo, risk aversion, state-dependent preferences, wealth

An Empirical Analysis of U.S. Aggregate Portfolio Allocations

This paper analyzes the important time variation in U.S. aggregate portfolio allocations. To do so, we first use flexible descriptions of preferences and investment opportunities to derive optimal decision rules that nest tactical, myopic, and strategic portofolio allocations. We then compare these rules to the data through formal statistical analysis. Our main results reveal that i) purely tactical and myopic investment behaviors are unambiguously rejected, ii) strategic portfolio allocations are strongly supported, and iii) the Fama-French factors best explain empirical portfolios shares.Dynamic Hedging, Risk Aversion, Inter-temporal Substitution, Time-Varying Investment Opportunity Set

Inter-Sectorial Risk Pooling and Wage Distributions

This paper develops a model where two agents in different sectors face uncorrelated income risks and mutually self-insure. We discuss how the rent arising from risk pooling modifies the wage distribution in the sector where the employer behaves as a monopsonist.risk pooling, family transfers

Asset Returns and State-Dependent Risk Preferences

We propose a consumption-based capital asset pricing model in which the representative agent's preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess returns on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functional form linking risk aversion with state variables. Our estimates are based on Markov chain Monte Carlo estimation of exact discrete-time parameterizations for linear diffusion processes. Since consumption risk is not forced to account for the entire risk premium, our results contrast sharply with estimates from models in which risk aversion is state-independent. We find that relaxing fixed risk preferences yields estimates for relative risk aversion that are (i) reasonable by usual standards, (ii) correlated with both consumption and returns and (iii) indicative of an additional preference risk of holding the assets. Nous suggérons un modèle d'équilibre de prix des actifs où les préférences de l'agent représentatif sont caractérisées par une aversion contingente au risque. Nous obtenons une équation de valorisation où la prime de risque dépend du risque de préférences en plus du risque de consommation habituel. Nous développons une application empirique qui ne nécessite pas une forme fonctionnelle reliant l'aversion non-observable à des variables économiques observables. Nos estimations sont basées sur une estimation en chaîne markovienne de Monte-Carlo pour des vraisemblances exactes de processus linéaires de diffusion appliquées aux données en temps discret. Puisque le risque de consommation n'a plus à justifier seul la forte prime de risque observée sur les fonds propres, nos estimations contrastent fortement avec celles obtenues dans le cas standard où l'aversion au risque est constante. En particulier, nous trouvons des estimés de l'aversion au risque qui sont (i) de niveau raisonnable, (ii) corrélés avec la consommation et les rendements et (iii) cohérents avec un risque additionnel de détention d'actifs.Asset Pricing Models, Bayesian Analysis, Continuous-time Econometric Models, Data Augmentation, Equity Premium Puzzle, Markov Chain Monte Carlo, Risk Aversion, State-Dependent Preferences, Wealth, Modèles de prix des actifs, analyse bayesienne, modèles économétriques en temps continu, augmentation de données, énigme de la prime de risque, chaîne markovienne de Monte Carlo, aversion au risque, préférences contingentes, richesse

An Empirical Analysis of U.S. Aggregate Portfolio Allocations

This paper analyzes the important time variation in U.S. aggregate portfolio allocations. To do so, we first use flexible descriptions of preferences and investment opportunities to derive optimal decision rules that nest tactical, myopic, and strategic portfolio allocations. We then compare these rules to the data through formal statistical analysis. Our main results reveal that i) purely tactical and myopic investment behaviors are unambiguously rejected, ii) strategic portfolio allocations are strongly supported, and iii) the Fama-French factors best explain empirical portfolio shares. Ce papier analyse la forte variation chronologique dans les portefeuilles agrégés américains. À cet effet, nous utilisons des descriptions flexibles des préférences et des opportunités d'investissement afin de dériver les allocations tactiques, myopes et stratégiques. Ces règles sont ensuite comparées aux données dans le cadre d'une analyse statistique formelle. Nos principaux résultats révèlent que i) les règles purement myopes ou tactiques sont rejetées, ii) les portefeuilles stratégiques sont supportés et iii) les facteurs Fama-French sont ceux qui reproduisent le mieux les allocations empiriques.factorial models of returns, myopic and strategic, non-expected utility, tactical portfolio allocations , modèles factoriels des rendements, myopes et stratégiques, portefeuilles tactiques, utilité non espérée

Direct Preference Wealth in Aggregate Household Portfolios

According to standard theory, wealth should have no intrinsic value. Yet, conventional wisdom, recent theories, and data suggest it might. We verify whether or not households have direct preferences over wealth in selecting assets. The fully structural econometric model focuses on a multivariate Brownian motion in optimal consumption, portfolios and wealth. Using aggregate portfolio data, we find that wealth (i) is directly valued, (ii) reduces marginal utility and (iii) reduces risk aversion, while we reject the HARA, and CRRA restrictions. Consequently, wealth-dependent utility generates a larger IMRS risk, justifying a larger, more predictable risk premium and a lower risk-free rate.Portfolio choice; Wealth-dependent preferences; Preference for status; Asset pricing; Equity premium; Risk-free rate; Predictability