Wealth Portfolio Research Articles

Equilibrium Models and Option Prices

In an equilibrium framework the dynamics of the aggregate dividend are taken as given and the volatility of the wealth portfolio is determined by the prices of risk in the model. Since option prices depend strongly on volatility they are very informative about these risk prices. We use this observation to compare the pricing of S&P 500 options to a model in which preferences are recursive and aggregate consumption has stochastic growth and volatility. We find that the pricing of the risk of shocks to the growth rate of consumption is inconsistent with a model in which the representative agent has isoelastic recursive utility.

Why Do Wealthy Parents Have Wealthy Children?

Strong intergenerational associations in wealth have fueled a longstanding debate over why children of wealthy parents tend to be well off themselves. We investigate the role of family background in determining children’s wealth accumulation and investor behavior as adults. The analysis is made possible by linking Korean-born children who were adopted at infancy by Norwegian parents to a population panel data set with detailed information on disaggregated wealth portfolios and socio-economic characteristics. The mechanism by which these Korean- Norwegian adoptees were assigned to adoptive families is known and effectively random. We use the quasi-random assignment to estimate the causal effects from an adoptee being raised in one type of family versus another. Our findings show that family background matters significantly for children’s accumulation of wealth and investor behavior as adults, even when removing the genetic connection between children and the parents raising them. In particular, adoptees raised by wealthy parents are more likely to be well off themselves, whereas adoptees’ stock market participation and portfolio risk are increasing in the financial risk taking of their adoptive parents. The detailed nature of our data allows us to explore mechanisms, assess the generalizability of the lessons from adoptees, and compare our findings to results from behavioral genetics decompositions.

Why Do Wealthy Parents Have Wealthy Children?

Strong intergenerational correlations in wealth have fueled a long-standing debate over why children of wealthy parents tend to be well off themselves. We investigate the role of family background in determining children's wealth accumulation and investor behavior as adults. Our research design allows us to credibly control for genetic differences in abilities and preferences and to identify the effects of exogenous changes in specific dimensions of family background. The analysis is made possible by linking Korean-born children who were adopted at infancy by Norwegian parents to a population panel data set with detailed information on disaggregated wealth portfolios and socioeconomic characteristics. The mechanism by which these Korean-Norwegian adoptees were assigned to adoptive families is known and effectively random. We use the quasi-random assignment to estimate the causal effects from an adoptee being raised in one type of family versus another. Our findings show that family background matters significantly for children's accumulation of wealth and investor behavior as adults, even when removing the genetic connection between children and the parents raising them. In particular, adoptees raised by wealthy parents are more likely to be well off themselves, whereas adoptees' stock market participation and portfolio risk are increasing in the financial risk taking of their adoptive parents. These intergenerational causal links are not driven primarily by inter vivos transfers or bequests. The detailed nature of our data allows us to explore other mechanisms, assess the generalizability of the lessons from adoptees, and compare our findings to results from behavioral genetics decompositions.

Risk Sensitive Portfolio Optimization in a Jump Diffusion Model with Regimes

This article studies a portfolio optimization problem, where the market consisting of several stocks is modeled by a multi-dimensional jump-diffusion process with age-dependent semi-Markov modulated coefficients. We study risk sensitive portfolio optimization on the finite time horizon. We study the problem by using a probabilistic approach to establish the existence and uniqueness of the classical solution to the corresponding Hamilton-Jacobi-Bellman (HJB) equation. We also implement a numerical scheme to investigate the behavior of solutions for different values of the initial portfolio wealth, the maturity, and the risk of aversion parameter.

Smoothing or Strengthening the Great Gatsby Curvee? The Intergenerational Impact of China's New Rural Pension Scheme

We examine the heterogeneous and dynamic impact of China’s New Rural Pension Scheme on intergenerational wealth dependence using a nationally representative longitudinal household survey covering the period 2011–13. We adopt an instrumental quantile regression–discontinuity design to address the endogeneity of partial compliance of the pension scheme and the observed individual heterogeneity. Overall, we find that the pension scheme smooths wealth dependence between generations in the short term, but strengthens the persistence of assets among the wealthiest households in the medium term. The mechanisms underlying these distributional effects are intergenerational transfers, time reallocation, and filial adjustments of the wealth portfolio. Complementary policy interventions, particularly for the poor across generations, would be needed to neutralize the distributional impact of the pension in terms of intergenerational wealth persistence.

Understanding the Unequal Post-Great Recession Wealth Recovery for American Families

Abstract The wealth of US families had not returned to its prerecession level by 2013, six years after the onset of the Great Recession. This article provides a comprehensive analysis of this slow and uneven episode of wealth recovery, using family-level data from the Survey of Consumer Finances 1989–2013. Both descriptive results and regressions controlling for life cycle wealth accumulation show that families of color and less-educated families are falling behind in wealth recovery because their wealth portfolios are concentrated in housing, which has recovered very slowly. The decomposition results suggest that homeownership plays a significant role in explaining wealth disparity by race, ethnicity, and education at the mean and bottom of the wealth distribution. Understanding the uneven wealth recovery has important implications for redesigning asset-related policies and narrowing wealth gaps.

Confronting Climate Change: The Uneasy Alliance of Scientists and Nonscientists in a Neoliberal World

Confronting Climate Change: The Uneasy Alliance of Scientists and Nonscientists in a Neoliberal World

Wealthy Hand‐to‐Mouth Households in China

The wealthy hand‐to‐mouth are households who are poor in liquid wealth (e.g. cash and checking accounts) and rich in illiquid wealth (e.g. housing and retirement accounts), while the poor hand‐to‐mouth are poor in both liquid and illiquid wealth. Data from the China Household Finance Survey reveal the following facts about the country’s wealthy hand‐to‐mouth. First, they represent the majority of the hand‐to‐mouth households in China. Second, they have different wealth portfolios and demographic features from the poor hand‐to‐mouth. Finally, they have larger consumption responses to income fluctuations than non‐hand‐to‐mouth households, after controlling for endogeneity, income, hand‐to‐mouth status and other household characteristics.

Approximate Solutions to Retirement Spending Problems and the Optimality of Ruin

Milevsky and Huang (2011) investigated the optimal retirement spending policy for a utility-maximizing retiree facing a stochastic lifetime but assuming deterministic investment returns. They solved the problem using techniques from the calculus of variations and derived analytic expressions for the optimal spending rate and wealth depletion time under the Gompertz law of mortality. Of course, in the real world financial returns are stochastic as well as lifetimes, raising the question of whether their qualitative insights and approximations are generalizable or practical. We solve the retirement income problem when investment returns are indeed stochastic using numerical PDE methods, assuming the principles of stochastic control theory and dynamic programming. But then -- and this is key -- we compare the proper optimal spending rates to the analytic approach presented in Milevsky and Huang (2011) by updating the portfolio wealth inputs to current market values. Our main practical conclusion is that this simplistic approximation when calibrated properly and frequently can indeed be used as an accurate guide for rational retirement spending policy. As a by-product of our PDE-based methodology, our results indicate that even though the wealth depletion time is no longer a certainty under stochastic returns, the expected age at which liquid wealth is exhausted (i.) takes place well before the maximum lifetime and (ii.) is also well approximated by our analytical solution.

Emerging wealth disparities after the storm: Evidence from Spain

We examine how the recession that started in December 2007 in the United States impacted wealth accumulation and inequality among Spanish households. We find that overall wealth dropped by 15 percent between 2008 and 2011, with losses concentrating among households in the mid and top wealth quintiles. The most hard hit wealth components were business assets, primary home equity, and durable assets, which declined by 40 percent, 23 percent and 19 percent, respectively. Wealth losses among all households were likely sustained by restricted access to credit. Nonetheless, in part due to their more diversified wealth portfolios, households in the top wealth quintile amassed a greater share of the country’s wealth during the recession. Consequently, wealth inequality, which receded during the expansionary years of 2002 through 2005, rose by 2008 and continued its trend in 2011.

Beating the Market: Dynamic Asset Allocation with a Market Portfolio Benchmark

Beating the market portfolio is a problem faced by many investors. Here, we formulate and solve a dynamic allocation problem that maximizes the utility of relative wealth of the investor's portfolio to that of the market portfolio. We also allow the investor to control the deviation of the optimal allocation from the market portfolio itself, and using stochastic control techniques, provide explicit closed form expressions for the optimal allocation. In addition, we demonstrate how the optimal portfolio can be factored into five passive rule-based portfolios: (i) global minimum variance portfolio; (ii) high-growth portfolio; (iii) high-cash-flow portfolio; (iv) equal-weight portfolio; and (v) risk-parity portfolio. Finally, some numerical experiments based on calibration to real-world data are presented to illustrate the risk-reward profile of the optimal allocation in comparison to these and other commonly used strategies.

The Wealthy Hand-To-Mouth in China

The wealthy hand-to-mouth are households who are poor in liquid wealth (e.g., cash and checking accounts) and rich in illiquid wealth (e.g., housing and retirement accounts), while the poor hand-to-mouth are poor in both wealth. Data from the China Household Finance Survey reveal the following facts about the country’s wealthy hand-to-mouth. First, they represent the majority of the hand-to-mouth households in China. Second, they have different wealth portfolios and demographic features from the poor hand-to-mouth. Last, they have larger consumption responses to income fluctuations than non hand-to-mouth households, after controlling for income, hand-to-mouth status, and other household characteristics.

Patrimony, class, and participation: French elections (1988–2012)

Perhaps no variable in political science has received more attention than electoral participation. Despite, or because of, the great amount of research on this topic, significant new determinants for electoral participation have not been recently forthcoming. Here we offer a significant new determinant – patrimony. For theoretical reasons, we expect a voter’s wealth portfolio to influence their turnout. We test these ideas using a battery of asset items asked in French election surveys. Our finding is that voters who possess more patrimony are more likely to vote. The strength of this patrimonial effect rivals the influence of the strongest traditional predictors, such as political interest. Finally, patrimonial effects seem able to subsume, even replace, the traditional class effects from income, occupation, and education. This pivotal empirical, as well as theoretical, role of patrimony suggests serious revision in the explanation of how socioeconomic forces shape electoral participation.

Recursive utility using the stochastic maximum principle

Motivated by the problems of the conventional model in rationalizing market data, we derive the equilibrium interest rate and risk premiums using recursive utility in a continuous-time model. We use the stochastic maximum principle to analyze the model. This method uses forward/backward stochastic differential equations, and works when the economy is not Markovian, which can be the case with recursive utility. With existence granted, the wealth portfolio is characterized in equilibrium in terms of utility and aggregate consumption. The equilibrium real interest rate is derived, and the resulting model is shown to be consistent with reasonable values of the parameters of the utility function when calibrated to market data, under various assumptions.

Portfolio selection strategy for fixed income markets with immunization on average

In this paper, we develop a portfolio optimization method to maximize the performance of a fixed income portfolio. To achieve this aim, we define a two-step optimization problem where we firstly manage the immunization risk and then we maximize the portfolio wealth in a reward–risk framework. In the first optimization step, we create funds of bonds with constant immunization measure over time, and we propose an innovative immunization measure for bond portfolio management that leads to a more flexible immunization approach and a better trade-off between reward and risk. In the second optimization step, maximizing two performance measures on these baskets of bonds we obtain portfolio strategies that consider different investors’ profiles. An empirical application to the US fixed income market during 2002–2012 period is provided. Applying the portfolio optimization method to different bond classes, we compare the results with an equity index. This ex-post analysis indicates the benefits of the proposed portfolio strategy in outperforming the benchmark and proves that capital flows to safer markets during crisis periods.

Optimal investment strategies in a certain class of stochastic Merton’s terminal wealth problems

The paper studies the classical stochastic Merton’s terminal wealth portfolio problem without transaction costs and also some related problems which may serve as efficient benchmarks for developing relevant analytical techniques as applied to problems with transaction costs. Very few analytical solutions are available for all these types of the Merton’s problem, whereas effective applications of substantially numerical approaches are strongly restricted. Hence, even for quite narrow classes of problems, the development of analytical techniques constructing exact representations for optimal value functions and the corresponding optimal feedback controls is of great theoretical and practical importance. Despite some advancements, sufficiently simple single-input control-affine systems without state constraints and the subject of optimal control synthesis are investigated rather poorly in analytical and qualitative aspects. The present paper is devoted to an entirely analytical construction of the global optimal control synthesis in a certain class of stochastic Merton’s terminal wealth problems. A significant feature of the obtained optimal feedback controls is their capability to be interpreted naturally and adequately from a financial point of view as well as to observe a significant qualitative difference between stochastic and limiting deterministic cases.

The Joint Distribution of Net Worth and Pension Wealth in Germany

Research on wealth inequality usually focuses on real and financial assets, while pension wealth – the present value of future pension entitlements from public and company pension schemes – receives little attention. This is astonishing, given that pension plans play an important role for material security and well‐being for an overwhelming part of the population and, thus, should be accounted for in peoples’ wealth portfolios. Using novel data from the Socio Economic Panel (SOEP), we show the incidence, relevance, and distribution of individual pension wealth, net worth, and augmented wealth (the sum of the two) in Germany. Further, we investigate age‐wealth‐profiles and differences between East and West Germany.

A New Perspective on the Fundamental Theorem of Asset Pricing for Large Financial Markets

In the context of large financial markets we formulate the notion of no asymptotic free lunch with vanishing risk (NAFLVR), under which we can prove a version of the fundamental theorem of asset pricing (FTAP) in markets with an (even uncountably) infinite number of assets, as it is, for instance, the case in bond markets. We work in the general setting of admissible portfolio wealth processes as laid down by Kabanov in [Statistics and Control of Stochastic Processes (Moscow, 1995/1996), World Sci. Publ., River Edge, NJ, 1997, pp. 191--203] under a substantially relaxed concatenation property and adapt the FTAP proof variant obtained in [C. Cuchiero and J. Teichmann, Finance Stoch., 19 (2015), pp. 743--761] for the classical small market situation to large financial markets. In the case of countably many assets, our setting includes the large financial market model considered by De Donno, Guasoni, and Pratelli [Stochastic Process. Appl., 115 (2005), pp. 2006--2022] and its abstract integration theory. The...

Better than pre-commitment mean-variance portfolio allocation strategies: A semi-self-financing Hamilton–Jacobi–Bellman equation approach

We generalize the idea of semi-self-financing strategies, originally discussed in Ehrbar (1990), and later formalized in Cui et al (2012), for the pre-commitment mean-variance (MV) optimal portfolio allocation problem. The proposed semi-self-financing strategies are built upon a numerical solution framework for Hamilton–Jacobi–Bellman equations, and can be readily employed in a very general setting, namely continuous or discrete re-balancing, jump-diffusions with finite activity, and realistic portfolio constraints. We show that if the portfolio wealth exceeds a threshold, an MV optimal strategy is to withdraw cash. These semi-self-financing strategies are generally non-unique. Numerical results confirming the superiority of the efficient frontiers produced by the strategies with positive cash withdrawals are presented. Tests based on estimation of parameters from historical time series show that the semi-self-financing strategy is robust to estimation ambiguities.

A convergence result for the Emery topology and a variant of the proof of the fundamental theorem of asset pricing

We show that no unbounded profit with bounded risk (NUPBR) implies predictable uniform tightness (P-UT), a boundedness property in the Emery topology introduced by Stricker (Séminaire de Probabilités de Strasbourg XIX, pp. 209–217, 1985). Combining this insight with well-known results of Mémin and Słominski (Séminaire de Probabilités de Strasbourg XXV, pp. 162–177, 1991) leads to a short variant of the proof of the fundamental theorem of asset pricing initially proved by Delbaen and Schachermayer (Math. Ann. 300:463–520, 1994). The results are formulated in the general setting of admissible portfolio wealth processes as laid down by Kabanov (Statistics and Control of Stochastic Processes, pp. 191–203, World Sci. Publ., River Edge, 1997).