Direct Preference Wealth in Aggregate Household Portfolios
AbstractAccording 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.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp136.
Date of creation: Mar 2005
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Portfolio choice; Wealth-dependent preferences; Preference for status; Asset pricing; Equity premium; Risk-free rate; Predictability;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-BEC-2005-04-16 (Business Economics)
- NEP-FIN-2005-04-16 (Finance)
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- Ricardo M. Sousa, 2007. "Wealth Shocks and Risk Aversion," NIPE Working Papers 28/2007, NIPE - Universidade do Minho.
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