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Direct Preference for Wealth in Aggregate Household Portfolio

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  • Pascal St-Amour

Abstract

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.

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Bibliographic Info

Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 05.04.

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Length: 44 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:lau:crdeep:05.04

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.05
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Web page: http://www.hec.unil.ch/deep/publications/cahiers/series
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Related research

Keywords: portfolio choice; wealth-dependent preferences; preference for status; asset pricing; equity premium; risk-free rate; predictability;

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References

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Cited by:
  1. Ricardo M. Sousa, 2007. "Wealth Shocks and Risk Aversion," NIPE Working Papers 28/2007, NIPE - Universidade do Minho.

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