Financial Wealth Research Articles

Consumption, personal income, financial wealth, housing wealth, and long-term interest rates: a panel cointegration approach for 50 US states

Abstract This study investigates the long-run and short-run relationship between consumption, income, financial and housing wealth, and a long-term interest rate for the 50 US states. Using an updated set of quarterly data from 1975 to 2018, we perform panel cointegration analysis allowing for cross-sectional dependence. We obtain the following results. First, there is strong evidence for cointegration among consumption and its determinants. Second, estimates of the housing wealth and financial wealth elasticity of consumption range from 0.072 to 0.115 and 0.044 to 0.080, respectively. Finally, Granger causality tests show that there is a bidirectional short-term causality between per capita consumption, income, and financial wealth in the short run and between all the variables in the long run.

Does financial literacy reduce financial fragility during COVID-19? The moderation effect of psychological, economic and social factors

PurposeThe present study examines the linkage between financial literacy and financial fragility during COVID-19. It further examines if financial literacy has a differential impact on financial fragility based on psychological (financial confidence), economic (wealth) and social (race) factors.Design/methodology/approachThe authors used nationally representative data of the American working age-group. They collated six different datasets collected at different time-periods to conduct the present study. Based on 2,202 observations, they conducted logistic regression analyses to test the proposed relationships.FindingsThe authors find that financial literacy reduces the odds of being financially fragile by 9.1%. Furthermore, they find that financially literate consumers having high financial confidence are less financially fragile during COVID-19. Besides, the adverse impact of financial literacy on financial fragility is more for consumers having more than less wealth. The interaction with race is not significant, suggesting that financial literacy cuts across racial boundaries.Practical implicationsFinancial fragility is an important factor having numerous deleterious consequences. The authors’ study found that financial confidence, psychological factor and wealth economic factor enhances the negative effect of financial literacy on financial fragility. Banks and financial institutes can develop mechanisms to infuse confidence in individuals during the pandemic to reduce their financial fragility. Policymakers and governments may increase awareness related to debt management practices and design financial literacy interventions to reduce financial fragility among individuals.Originality/valueThe study is one of the initial studies to examine the antecedents of financial fragility. Based on a time-lagged data, the authors’ study examines the linkage between financial literacy and financial fragility. Though scholars have investigated financial literacy and its implications, scholarly work in this domain during COVID-19 is at best limited. The study contributes to the literature by testing the effects of boundary conditions that can change financial literacy's impact on financial fragility.

The distribution of wealth in Spain and the USA: the role of socioeconomic factors

The literature has typically found that the distribution of socioeconomic factors like education, labor status and income does not account for the remarkable wealth inequality disparities between countries. As a result, their different institutions and other latent factors receive all the credit. Here, we propose to focus on one type of wealth inequality, the inequality of opportunities (IOp) in wealth: the share of overall wealth inequality explained by circumstances like inheritances and parental education. By means of a counterfactual decomposition method, we find that imposing the distribution of socioeconomic factors of the USA into Spain has little effect on total, financial and real estate wealth inequality. On the contrary, these factors play an important role when wealth IOp is considered. A Shapley value decomposition shows that the distribution of education and labor status in the USA consistently increase wealth IOp when imposed into Spain, whereas the opposite effect is found for the distribution of income.

Optimal Target-Date Funds for Observed Savings Rates

We study optimal life-cycle portfolio allocation and its application to target-date fund (TDF) design. We show that optimal TDF allocation must be explicitly linked to a savings rate; for example, a higher savings rate generating higher financial wealth accumulation should necessarily come with a more conservative TDF. Further, we quantify the extent to which accumulated wealth, the investing environment, and participant characteristics affect TDF allocations and compare the resulting optimal allocations against the observed universe of U.S. TDF products. Plan sponsors and asset managers can use these findings to improve TDF selection and design.

Consistent investment of sophisticated rank‐dependent utility agents in continuous time

AbstractWe study portfolio selection in a complete continuous‐time market where the preference is dictated by the rank‐dependent utility. As such a model is inherently time inconsistent due to the underlying probability weighting, we study the investment behavior of a sophisticated consistent planners who seek (subgame perfect) intra‐personal equilibrium strategies. We provide sufficient conditions under which an equilibrium strategy is a replicating portfolio of a final wealth. We derive this final wealth profile explicitly, which turns out to be in the same form as in the classical Merton model with the market price of risk process properly scaled by a deterministic function in time. We present this scaling function explicitly through the solution to a highly nonlinear and singular ordinary differential equation, whose existence of solutions is established. Finally, we give a necessary and sufficient condition for the scaling function to be smaller than one corresponding to an effective reduction in risk premium due to probability weighting.

Implicit incentives for fund managers with partial information

We study the optimal asset allocation problem for a fund manager whose compensation depends on the performance of her portfolio with respect to a benchmark. The objective of the manager is to maximise the expected utility of her final wealth. The manager observes the prices but not the values of the market price of risk that drives the expected returns. Estimates of the market price of risk get more precise as more observations are available. We formulate the problem as an optimization under partial information. The particular structure of the incentives makes the objective function not concave. Therefore, we solve the problem by combining the martingale method and a concavification procedure and we obtain the optimal wealth and the investment strategy. A numerical example shows the effect of learning on the optimal strategy.

Wealth Inequality and the Financial Accumulation Process

Previous theoretical and computational analyses demonstrate that uncorrelated variations in individual asset returns promote extreme inequality in financial wealth. This paper describes a standard individual-based computational model of this financial accumulation process and then extends it in order to expose other key influences on wealth inequality. We find large effects of individual behavior, cultural practices, tax policy, and technological change. Specifically, we present simulation experiments with heterogeneous saving rates, a stylized marriage institution, a wealth tax structured to mirror contemporary policy proposals, and variations in wage growth. These experiments demonstrate that modest concessions to realism have large effects on long-run wealth inequality in models of the financial accumulation process.

Brick-by-brick inequality. Homeownership in Italy, employment instability and wealth transmission.

This paper investigates changes between, and inequalities within, birth-cohorts in Italy, surrounding homeownership. Italy is a homeownership and familialistic society, where in recent decades an increasing 'generational divide' in employment prospects has opened up, as a side-effect of a partial and targeted labour market deregulation. Drawing on the interplay of macro-level constraints with micro-level factors, we discuss patterns of inequality in attaining homeownership between cohorts, arising from greater instability of employment for young adults, and within cohorts, stemming from class-based patterns of intergenerational wealth transmission. Our analytical strategy combines a sequential cohort design with two levels of analysis that simultaneously consider young people around the normative age of housing independence and wealth transmission from their families triggered by their leaving the nest. Longitudinal analyses apply random-effects probit models and linear probability distributed fixed-effects to panel data from the Bank of Italy (SHIW 1989-2016). Results show a decrease in homeownership attainment across cohorts, which can be partially ascribed to employment disadvantages faced by younger cohorts. On top of this, class-specific patterns of intergenerational transmission are in place: lower classes rely on timely housing wealth transfers, whereas upper classes are prepared to provide their children with an extended stream of financial transfers.

Artificial intelligence and fintech: An overview of opportunities and risks for banking, investments, and microfinance

AbstractArtificial Intelligence (AI) is creating a rush of opportunities in the financial sector, but financial organizations need to be aware of the risks inherent in the use of this technology. Financial organizations are integrating AI in their operations: in‐house, outsourced, or ecosystem‐based. The growth of AI‐based fintech firms has encouraged several mergers and acquisitions among financial service providers and wealth managers as they grapple with volatility, uncertainty, complexity, and ambiguity. AI's unique promise of combined cost reduction and increased differentiation makes it generally attractive across the board. However, perhaps other than fraud detection, these benefits depend on the scale of an organization. Risk arises from nonrepresentative data, bias inherent in representative data, choice of algorithms, and human decisions, based on their AI interpretations (and whether humans are involved at all once AI has been unleashed). Risk reduction requires a vigilant division of labour between AI and humans for the foreseeable future.

Cover’s Rebalancing Option with Discrete Hindsight Optimization

The author studies T. Cover’s rebalancing option (Ordentlich and Cover 1998) under discrete hindsight optimization in continuous time. The payoff in question is equal to the final wealth that would have accrued to an initial deposit of 1 unit of the numéraire into the best of some finite set of (perhaps levered) rebalancing rules determined in hindsight. A rebalancing rule (or fixed-fraction betting scheme) amounts to fixing an asset allocation (i.e., 200% equities and −100% bonds) and then continuously executing rebalancing trades so as to counteract allocation drift. Restricting the hindsight optimization to a small number of rebalancing rules (i.e., 2) has some advantages over the pioneering approach taken by Cover &amp; Company in their theory of <i>universal portfolios</i> (1986, 1991, 1996, 1998), wherein one’s trading performance is benchmarked relative to the final wealth of the best unlevered rebalancing rule (of any kind) in hindsight. Our approach lets practitioners express an <i>a priori</i> view that one of the favored asset allocations (“bets”) in the set {<i>b</i>₁, …, <i>b_n</i>} will turn out to have performed spectacularly well in hindsight. In limiting our robustness to some discrete set of asset allocations (rather than all possible asset allocations), we reduce the price of the rebalancing option and guarantee that we will achieve a correspondingly higher percentage of the hindsight-optimized wealth at the end of the planning period. A practitioner who lives to delta-hedge this variant of Cover’s rebalancing option through several decades is guaranteed to see the day that his realized compound-annual capital growth rate is very close to that of the best <i>b_i</i> in hindsight, hence the point of the rock-bottom option price.

Системно-целостная междисциплинарная методология – качественно новый инструментарий общего и профессионального образования в условиях осуществления Второй индустриализации России

The education system is a key element in the progress or degradation of the country's population and economy. Formed in the present education system of Russia according to the Bologna models and the patterns aimed at stupefying the total population, a sharp decline of scientific progress in social production and increased dependence on foreign manufacturers and managers of the domestic financial and resource wealth. The way out of this deadlock circle of problems is in the revival of the advanced positions of the former soviet education system on a qualitatively new scientific basis, theory and system-holistic methodology, providing a full knowledge of the phenomena of nature and society in conditions of certainty. Existing methodologies of partial cognition in conditions of high degree of uncertainty and subjectivity of representation are based on outdated and inadequate theories. &#x0D; System-holistic interdisciplinary methodology is characterized by a set of necessary and sufficient for objective and complete knowledge of the conceptual tools that allow you to accurately, fully and adequately understand the socio-economic processes, to lead the knowledge immediately from the general to the specific, thereby reducing the multiple time and resources for the process of knowledge. It is based on a qualitatively new scientific basis, objective theory, uses objective units of dimensions of physical quantities (kWh and the like), takes into account in the knowledge and management of the action of an expanded set of universal and socio-economic laws of human development-society in nature. A deeper analysis of the set of laws allowed us to identify the main goal of human development-society and the main socio-economic forms of manifestation of the laws: useful costs-results, useless, harmful, loss of cost-results in the structure of the budget of social time. There are no other socio-economic forms of human activity. Therefore, the main goal of human development-society in nature is to increase the share of useful and reduce the share of useless, harmful, loss of cost-results in the structure of the budget of social time. This is the basis for the preservation of civilization on Earth. The technique, technology, organization, education system used serve only as forms of manifestation of life that contribute to or hinder the progress of mankind. The implementation of the Second industrialization of Russia is aimed at a radical solution to the ever-increasing complex of internal and external problems in modern conditions. A key element of the successful implementation of this large-scale strategic program is the immediate introduction of a fundamentally new education system that ensures high rates of economic growth and well-being of the entire population of Russia.

Quantile-based optimal portfolio selection

In this paper the concept of quantile-based optimal portfolio selection is introduced and a specific portfolio connected to it, the conditional value-of-return (CVoR) portfolio, is proposed. The CVoR is defined as the mean excess return or the conditional value-at-risk (CVaR) of the return distribution. The portfolio selection consists solely of quantile-based risk and return measures. Financial institutions that work in the context of Basel 4 use CVaR as a risk measure. In this regulatory framework sufficient and necessary conditions for optimality of the CVoR portfolio are provided under a general distributional assumption. Moreover, it is shown that the CVoR portfolio is mean-variance efficient when the returns are assumed to follow an elliptically contoured distribution. Under this assumption the closed-form expression for the weights and characteristics of the CVoR portfolio are obtained. Finally, the introduced methods are illustrated in an empirical study based on monthly data of returns on stocks included in the S&P index. It is shown that the new portfolio selection strategy outperforms several alternatives in terms of the final investor wealth.

The legacy effect of socialism on risky savings

ABSTRACT The riskiness of individuals’ saving behaviour affects their old-age wealth and has wider-ranging implications for macroeconomic development and stability. To which extent individuals take financial risks depends on their preferences, which may be moulded by the economic system they live in. I analyse households’ financial risk taking after the collapse of the German Democratic Republic. Conditional on their income and financial wealth positions, East German households were more prone to financial risk taking than West German households after reunification. The differences in risk taking were quantitatively relevant shortly after reunification and gradually vanished until 2008. Risk taking of households who were exposed to the socialist system longer was higher.

How Much Taxes Will Retirees Owe on Their Retirement Income?

To evaluate their retirement resources, households approaching retirement will examine their Social Security statements, defined benefit pensions, defined contribution balances, and other financial assets. However, many households may forget that not all of these resources belong to them; they will need to pay some portion to federal and state government in taxes. It is unclear, however, just how large the tax burden is for the typical retired household and for households with different income levels. This project aims to shed light on the tax burdens that retirees face by estimating lifetime taxes for a group of recently retired households. The project uses data from the Health and Retirement Study (HRS) linked to administrative earnings to determine Social Security benefits and administrative records on state of residence to estimate state tax liabilities. Income is then projected over the expected retirement of each household. Federal and state taxes, are estimated with TAXSIM, for each household on its reported and projected income. The paper found that: • These estimates show that households in the aggregate will have to pay about 6 percent of their income in federal and state income taxes. • But this liability rests primarily with the top quintile of the income distribution. • For the lowest four quintiles, taxes are negligible – ranging from 0 percent to 1.9 percent. • In contrast, the average liability is 11.3 percent for the top quintile, 16.4 percent for the top 5 percent, and 22.7 percent for the top 1 percent. The policy implications of the findings are: • Taxes are meaningful for the top quintile, who are mostly married couples with average combined Social Security benefits of $50,900, 401(k)/IRA balances of $325,400 and financial wealth of $441,400. • If these retirement and financial assets were fully annuitized, the amount a household would receive is equivalent to about $3,000 a month, and these households face tax liabilities of about 11 percent. • Thus, for many households reliant on 401(k)/IRA or financial assets for security in retirement, taxes are an important consideration.

Research on the Influencing Factors of Purchasing Internet Financial Wealth Management Products based on AHP

Internet financial wealth management product(IFWMP) has recently been one of the most popularity. There is limited quantitative research on IFWMP which can helps customers to choose the products based on the significance of each factor. In the paper, a multi-criteria decision-making model of IFWMP was developed, namely analytic hierarchy process (AHP) which is used to make decisions to the unstructured problems through quantifying weights of each criterion. This paper investigated ten influential factors relevant to the purchase of IFWMP and analyzed the frequency of collected responds to show the significance of factors. Based on the quantified weights, the result of the research indicated that compatibility, product liquidity, perceived ease of use and perceived usefulness affect the investors purchasing behaviors most that every investors should pay great attention to.

Financialisation and the Portuguese private consumption: two contradictory effects?

ABSTRACT This paper makes an empirical evaluation of the relationship between financialisation and the Portuguese private consumption by performing a time series econometric analysis from the first quarter of 1996 to the third quarter of 2019. Framed within the post-Keynesian literature, financialisation has two contradictory effects on private consumption. The first one corresponds to the fall in the households’ labour income, which favours a deceleration of private consumption. The second one corresponds to the increase of households’ debt and the increase of households’ financial and housing wealth, which favours an acceleration of private consumption. The global net effect of financialisation tends to be positive because the beneficial wealth effect suppresses the harmful income effect. We estimated a private consumption equation that includes four control variables (unemployment rate, inflation rate, short-term interest rate and long-term interest rate) and three variables linked to financialisation (labour income, net financial wealth and housing wealth). Our results confirm that labour income, net financial wealth and housing wealth are positive determinants of Portuguese private consumption. Our results also show that financialisation has represented an important driver of Portuguese private consumption, particularly due to the beneficial effects of net financial wealth.

Review: Revenge of the She-Punks: A Feminist Music History from Poly Styrene to Pussy Riot, by Vivien Goldman

Review: <i>Revenge of the She-Punks: A Feminist Music History from Poly Styrene to Pussy Riot</i>, by Vivien Goldman

Labour supply responses to financial wealth shocks: evidence from Italy

AbstractWe look at how strongly shocks to wealth affect labour supply, using Italian data. We use asset price shocks to provide a measure of wealth changes that is exogenous to the household's saving and labour supply. Results point to significant effects of wealth on hours of work, whether agents leave their jobs and labour earnings. The magnitude of these effects can be substantial – for example, for individuals who suffered larger wealth losses during the financial crisis. Responses are similar for men and women on average, but older working‐age individuals have relatively strong responses that drive the population results. Short‐run effects are somewhat persistent.

Optimization of stock trading with additional information by Limit Order Book

Nowadays stocks and futures are traded in electronic order-driven markets, in which orders to buy and sell are centralized in a Limit Order Book (LOB), and LOB provides more information about the stocks than their prices, such as the price dynamics and the prediction probability of the next move. In this paper, we investigate how and why Limit Order Book can improve the trading decision making. We propose a conditional binomial model for a stock price with conditional upward probability based on observations. We formulate the stock portfolio management as an optimization problem with observations, and optimal schemes are given for single-stock and multi-stock portfolios with observations. Compared with the strategies that do not consider the observations, we show that the final expected wealth achieves significant improvements. Finally, two real-data-based examples are conducted to demonstrate the efficiency of our schemes. Our work points to a new direction in improving the final wealth in portfolio management; and it illustrates the advantages of event-based optimization approach, which was successfully applied in discrete event dynamics systems.

Multi-Horizon Financial and Housing Wealth Effects across the U.S. States

We investigate for the presence of multi-horizon wealth effects across U.S. states over the period of 1975:Q2 to 2012:Q2 by utilizing multi-horizon non-causality testing and multi-horizon causality measurement. At the state/aggregate level, we document that housing wealth has more statistically significant and persistent impact on private consumption than financial wealth. We also find that state-level housing/financial wealth effects are present at long time horizons and exhibit heterogeneity across the U.S. From a policy perspective, we suggest that state-level policies may specifically utilize the housing market to support consumption and growth.