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Direct Preference Wealth in Aggregate Household Portfolios

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  • Pascal St-Amour

    (Hec, University of Lausanne)

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.

Suggested Citation

  • Pascal St-Amour, 2005. "Direct Preference Wealth in Aggregate Household Portfolios," FAME Research Paper Series rp136, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp136
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    File URL: http://www.swissfinanceinstitute.ch/rp136.pdf
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    References listed on IDEAS

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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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    More about this item

    Keywords

    Portfolio choice; Wealth-dependent preferences; Preference for status; Asset pricing; Equity premium; Risk-free rate; Predictability;
    All these keywords.

    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

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