Working Paper: NBER ID: w21686
Authors: Felipe S. Iachan; Plamen T. Nenov; Alp Simsek
Abstract: Financial innovation in recent decades has expanded portfolio choice. We investigate how greater choice affects investors’ savings and asset returns. We establish a choice channel by which greater portfolio choice increases investors’ savings—by enabling them to earn the aggregate risk premium or to take speculative positions. In equilibrium, portfolio customization (access to risky assets beyond the market portfolio) reduces the risk-free rate. Participation (access to the market portfolio) reduces the risk premium but typically increases the risk-free rate. Empirically, stock market participants in the U.S. save more than nonparticipants, and have increasingly dispersed portfolio returns, consistent with the choice channel.
Keywords: financial innovation; portfolio choice; savings; asset returns; market participation
JEL Codes: E21; E43; E44; G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| greater portfolio choice (G11) | increased savings (D14) |
| financial innovations (O16) | greater portfolio choice (G11) |
| greater portfolio choice (G11) | increased perceived risk-adjusted return (G11) |
| increased perceived risk-adjusted return (G11) | increased savings (D14) |
| stock market participation (G10) | increased savings (D14) |
| customization opportunities (L15) | greater dispersion in portfolio returns (G11) |
| greater dispersion in portfolio returns (G11) | increased speculation among investors (D84) |