The Portfolios and Financial Decisions of High Net-Worth U.S. Households, with L. Viceira and I. Walter, Coming Soon! Abstract
How do wealthy U.S. households invest? Do they do so according to the predictions of finance theory? How can we amend our theories to better fit real life investment behavior? The objective of our project is to describe the portfolio positions and transactions of a sample of high net worth US households (average net worth equal to $90 Millions) over the period from 2000 to 2009. We analyze the asset classes they invest in, their performance, the degree of diversification, the amount and timing of their rebalancing activity, and the characteristics, risk, liquidity, and tax status of their investments. Our time frame will also allow us to study in detail the behavior of these investors during the boom and the subsequent financial crisis. In particular, the recent financial crisis provides a valuable and interesting window on investors behavior, their reaction to changes in investment opportunities, liquidity dry-ups and risk.
Who is Internationally Diversified? Evidence from 296 401(k) Plans, with G. Bekaert, K. Hoyem, and W. Hu. April 2015, Submitted. Abstract
We examine the international equity allocations of over 3 million individuals in 296 401(k) plans over the 2006-2011 period. These allocations show enormous cross-individual variation, ranging between zero and over 75%, as well as an upward trend that is only partially accounted for by the slight decrease in importance of the US market relative to the world market. International equity allocations also display strong cohort effects, with younger cohorts investing more internationally than older ones, but also each cohort investing more internationally over time. This finding suggests that the home bias phenomenon may slowly disappear over time. Worker's salary has a positive effect on international allocations, while account balance has a negative one, but these effects are not economically large. Education, financial literacy and the fraction of foreign-born population measured at the zip code level have strong positive effects on international diversification, consistent with familiarity and information stories. In addition, states with more exports have higher international allocation.
Love & Loans. The Effect of Beauty and Personal Characteristics in Credit Markets, November 2012, Submitted. Abstract
I find that beauty, race, age, and personal characteristics affect lenders' decisions, once credit and employment history, homeownership, and other hard financial information are taken into account. Beautiful applicants have 1.59% higher probability of getting loans, pay 60bps less, but have similar default rates than average looking borrowers who get worse terms. Blacks are less likely to get loans, pay higher rates than similar Whites, but default more. The findings are consistent with taste-based discrimination/misperception against the ugly, and with statistical discrimination against Blacks, although lenders specialization in borrowers from the same ethnicity and racial prejudice also play a role.
Risk Aversion and Wealth. Evidence from Person-to-Person Lending Portfolios. (with D. Paravisini and V. Rappoport), April 2015. Management Science, Accepted. Abstract
We estimate risk aversion from investors' financial decisions in a person-to-person lending platform. We develop a method that obtains a risk aversion parameter from each portfolio choice. Since the same individuals invest repeatedly, we construct a panel dataset that we use to disentangle heterogeneity in attitudes towards risk across investors, from the elasticity of risk aversion to changes in wealth. We find that wealthier investors are more risk averse in the cross section, and that investors become more risk averse after a negative housing wealth shock. Thus, investors exhibit preferences consistent with decreasing relative risk aversion and habit formation.
Habit Formation and Keeping Up with the Joneses: Evidence from Micro Data (November 2007)
This paper provides evidence that habit persistence is an important determinant of household consumption choices, in a setting that allows for heterogeneity and household-specific interest rates. By estimating Euler equations for a representative sample of U.S. credit card account holders, I find that the strength of the external habit, captured by the fraction of the consumption of the reference group that enters the utility function, is 0.290; while the strength of internal habit, represented by household past consumption, is 0.503. These findings provide empirical support to the theories that explain macroeconomic and asset pricing phenomena by introducing habit persistence in the utility function. The results are robust to the inclusion of the income growth rate and other measures of economic activity in the regression, changes in the specification and the instrument set, and tests of liquidity constraints and precautionary saving motives. I also show that this result carries over in the aggregate, once heterogeneity and market incompleteness are taken into account by aggregating the Euler equations as a weighted average of individual marginal rates of substitution. On the contrary, I find that an econometrician that used per capita consumption, constructed from the same data, and a representative agent framework, would find no evidence of habit persisten
Increasing Income Inequality, External Habits, and Self-Reported Happiness(with Karen Dynan) American Economic Review, P&P, May 2007. Abstract
In this short paper we take a first look at the question of whether the increasing income inequality that the US has witnessed in the past 25 years has generated increasing unhappiness in those who have been falling behind, despite their real income has risen markedly. If an individual's utility depends not only on the level of her own consumption but also on how that level compares with the consumption of others, then the observed widening of the income distribution may have implications for the happiness of different groups that go beyond those associated with the changes in their respective incomes. We find that people's happiness appears to depend positively on how well their socio-economic group is doing relative to the average in their geographic area, even after controlling for the level of their own income. In addition, we find some evidence that the relationship is much stronger for people whose group has above-average income than for people whose group has below-average income; it would thus appear that relative concerns do not become an issue until a person has attained a certain place within the income distribution.
What Do Independent Directors Know? Evidence from their Trading? (with Paola Sapienza) The Review of Financial Studies, September 2009. Abstract
We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm's officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with the weakest governance and the gap between these two groups widens in such firms. Independent directors who sit on the audit committee earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around earnings restatements
WORK IN PROGRESS
The Performance and Fees of Investment Advisors and Private Wealth Managers (with L. Viceira and I. Walter)
Automatic Enrollment, Escalation Clauses and Retirement Savings