Published papers
“Asset
Pricing in a Production Economy with Chew-Dekel
Preferences” with Rui
Castro and Gian Luca Clementi. 2009. Forthcoming in
the Review of Economic Dynamics.
In this paper we provide a thorough
characterization of the asset returns implied by a simple general equilibrium
production economy with Chew–Dekel risk preferences
and convex capital adjustment costs. When households display levels of
disappointment aversion consistent with the experimental evidence, a version of
the model parameterized to match the volatility of output and consumption
growth generates unconditional expected asset returns and price of risk in line
with the historical data. For the model with Epstein–Zin
preferences to generate similar statistics, the relative risk aversion
coefficient needs to be at least 50, two orders of magnitude higher than the
estimates available so far. We argue that this is not surprising, given the
limited risk imposed on agents by a reasonably calibrated stochastic growth
model.
“Life-cycle Portfolio Choice : The Role of Heterogeneous Under-Diversification”
2009, forthcoming in the Journal of Economic Dynamics and Control.
In
life-cycle portfolio choice models it is standard to assume that all agents
invest in a diversified stock market index. In contrast
recent
empirical evidence, summarized in
“Increasing Return to Savings
and Wealth Inequality” Review of Economic
Dynamics (2007), 10,4, pp 646-675
In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households' portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I first use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns to savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible difference between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index of the U.S. Distribution of wealth.
Working papers
“Private Equity Returns in a
Model of Entrepreneurial Choice with Learning” March 2009
Entrepreneurs invest a large share of their financial wealth in a single business that they personally manage. Despite the large risk implied by this undiversified investment they do not seem to require any extra return on a diversified public equity index. In light of the large public equity premium this fact seems puzzling. In the present paper I use a quantitative model of entrepreneurial choice with learning over unknown firm quality to explore this issue and find that the choice to be entrepreneurs can be rationalized even with a negative private equity premium when the full return on entrepreneurial investment is properly accounted for.
This paper
is a largely revised version of a previous work that appeared under the title “Learning and the Return to Private Equity”
Learning, Ambiguity
and Life-Cycle Portfolio Allocation October 2008
In the present
paper I develop a life-cycle portfolio choice model where agents perceive stock
returns to be ambiguous and are ambiguity averse. As
in Epstein and Schneider (2005) part of the
ambiguity vanishes over time
as a consequence of learning over observed returns. The model shows that
ambiguity alone can rationalize moderate stock market participation rates and
conditional shares with reasonable participation costs but has strongly
counterfactual implications for conditional allocations to stocks by age and
wealth. When learning is allowed, conditional shares over the life-cycle are
instead aligned with the empirical evidence and patterns of stock holdings over
the wealth distribution get closer to the data.