Working Paper: CEPR ID: DP13116
Authors: John Y. Campbell; Tarun Ramadorai; Ben Ranish
Abstract: We use data on Indian stock portfolios to show that return heterogeneity is the primary contributor to increasing inequality of wealth held in risky assets by Indian individual investors. Return heterogeneity increases equity wealth inequality through two main channels, both of which are related to the prevalence of undiversified accounts that own relatively few stocks. First, some undiversified portfolios randomly do well, while others randomly do poorly. Second, larger accounts diversify more effectively and thereby earn higher average log returns even though their average simple returns are no higher than those of smaller accounts.
Keywords: wealth inequality; equities; diversification; India
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| return heterogeneity (B50) | wealth inequality (D31) |
| larger, more diversified accounts (G29) | higher average log returns (G17) |
| higher average log returns (G17) | wealth accumulation (E21) |
| log return heterogeneity (C46) | change in cross-sectional variance of log account size (C22) |
| undiversified portfolios (G11) | divergence in wealth (D31) |