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How Much and How Fast Do Investors Respond to Equity Premium Changes? Evidence from Wealth Taxation

Author

Listed:
  • Andreas Fagereng
  • Luigi Guiso
  • Marius A. K. Ring

Abstract

Using administrative panel data on Norwegian investors’ portfolios, we document strong but slow portfolio allocation responses to a persistent wealth-tax-induced shock to the equity premium. Short-run responses resemble the modest sensitivity documented using surveys. The longer-run responses are much larger and can be rationalized by moderate risk aversion. We document that equity premium shocks affect stock market entry but not exits, suggesting that entry costs dominate participation costs. Our finding of slow responses supports the asset-pricing literature that uses adjustment frictions to explain important asset-pricing puzzles, and has implications for optimal capital taxation when tax rates differ across assets.

Suggested Citation

  • Andreas Fagereng & Luigi Guiso & Marius A. K. Ring, 2026. "How Much and How Fast Do Investors Respond to Equity Premium Changes? Evidence from Wealth Taxation," NBER Working Papers 35262, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35262
    Note: AP PE
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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G5 - Financial Economics - - Household Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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