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The Choice Channel of Financial Innovation

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  • 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 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 United States save more than nonparticipants and have increasingly dispersed portfolio returns, consistent with the choice channel.

Suggested Citation

  • Felipe S. Iachan & Plamen T. Nenov & Alp Simsek, 2021. "The Choice Channel of Financial Innovation," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 333-372, April.
  • Handle: RePEc:aea:aejmac:v:13:y:2021:i:2:p:333-72
    DOI: 10.1257/mac.20180429
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    Cited by:

    1. Buss, Adrian & Uppal, Raman, 2017. "Financial Innovation and Asset Prices," CEPR Discussion Papers 12416, C.E.P.R. Discussion Papers.
    2. Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2016. "Monetary policy for a bubbly world," Economics Working Papers 1533, Department of Economics and Business, Universitat Pompeu Fabra, revised Feb 2020.
    3. Atif R. Mian & Ludwig Straub & Amir Sufi, 2020. "Indebted Demand," NBER Working Papers 26940, National Bureau of Economic Research, Inc.
    4. Saki Bigio & Eduardo Zilberman, 2020. "Speculation-Driven Business Cycles," Working Papers Central Bank of Chile 865, Central Bank of Chile.
    5. Patir, Assaf, 2017. "Securitization, bank vigilance, leverage and sudden stops," MPRA Paper 81463, University Library of Munich, Germany.
    6. Ricardo J Caballero & Alp Simsek, 2020. "A Risk-Centric Model of Demand Recessions and Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 135(3), pages 1493-1566.
    7. Ricardo J. Caballero & Alp Simsek, 2019. "Prudential Monetary Policy," NBER Working Papers 25977, National Bureau of Economic Research, Inc.
    8. Martin Guzman & Joseph E. Stiglitz, 2016. "Pseudo-wealth and Consumption Fluctuations," NBER Working Papers 22838, National Bureau of Economic Research, Inc.
    9. Gao, George P. & Lu, Xiaomeng & Song, Zhaogang & Yan, Hongjun, 2019. "Disagreement beta," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 96-113.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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