The Choice Channel of Financial Innovation

The Choice Channel of Financial Innovation

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.

Felipe S. Iachan, Plamen T. Nenov, and Alp Simsek

American Economic Journal: Macroeconomics

April 2021

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By |2021-04-07T14:53:52-07:00January 1st, 2018|Financial Regulation, Inequality, Reference, Systemic Risk/Financial Crises|