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Report
A Demand System Approach to Asset Pricing
Yogo, Motohiro; Koijen, Ralph S. J. (2015-04-17)
This Staff Report was previously titled "An Equilibrium Model of Institutional Demand and Asset Prices." {{p}} We develop an asset pricing model with rich heterogeneity in asset demand across investors, designed to match institutional holdings data. The equilibrium price vector is uniquely determined by market clearing, which equates the supply of each asset to aggregate demand. We estimate the model on U.S. stock market data by instrumental variables, under an identifying assumption that allows for price impact. The model sheds light on the role of institutions in stock market ...
Staff Report , Paper 510

Report
Health and Mortality Delta: Assessing the Welfare Cost of Household Insurance Choice
Koijen, Ralph S. J.; Van Nieuwerburgh, Stijn; Yogo, Motohiro (2014-06-11)
We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and ...
Staff Report , Paper 499

Working Paper
Labor-Market Uncertainty and Portfolio Choice Puzzles
Chang, Yongsung; Karabarbounis, Marios; Hong, Jay H. (2014-06-14)
The standard theory of household-portfolio choice is hard to reconcile with the following facts: (i) Households hold a small amount of equity despite the higher average rate of return. (ii) The share of risky assets increases with the age of the household. (iii) The share of risky assets is disproportionately larger for richer households. We develop a life-cycle model with age-dependent unemployment risk and gradual learning about the income profile that can address all three puzzles. Young workers, on average asset poor, face larger labor-market uncertainty because of high unemployment risk ...
Working Paper , Paper 14-13

Working Paper
Insurers’ Investments and Insurance Prices
Knox, Benjamin; Sørensen, Jakob Ahm (2024-07-19)
We develop a theory that connects insurance prices, insurance companies’ investment behavior, and equilibrium asset prices. Consistent with the model’s predictions, we show empirically that (1) insurers with more stable insurance funding take more investment risk and, therefore, earn higher average investment returns; (2) insurers set lower prices on policies when expected investment returns are higher, both in the cross-section of insurance companies and in the time series. Our results hold for both life insurance and property and casualty insurance companies. The findings show that ...
Finance and Economics Discussion Series , Paper 2024-058

Working Paper
Monetary Policy over the Life Cycle
Braun, R. Anton; Ikeda, Daisuke (2021-08-20)
A tighter monetary policy is generally associated with higher real interest rates on depositsand loans, weaker performance of equities and real estate, and slower growth in employment andwages. How does a household’s exposure to monetary policy vary with its age? The size andcomposition of both household income and asset portfolios exhibit large variation over the lifecycle inJapanese data. We formulate an overlapping generations model that reproduces these observationsand use it to analyze how household responses to monetary policy shocks vary over the lifecycle. Boththe signs and the ...
FRB Atlanta Working Paper , Paper 2021-20a

Working Paper
Life-Cycle Portfolio Choices and Heterogeneous Stock Market Expectations
Velásquez-Giraldo, Mateo (2024-12-20)
Survey measurements of households’ expectations about U.S. equity returns show substantial heterogeneity and large departures from the historical distribution of actual returns. The average household perceives a lower probability of positive returns and a greater probability of extreme returns than history has exhibited. I build a life-cycle model of saving and portfolio choices that incorporates beliefs estimated to match these survey measurements of expectations. This modification enables the model to greatly reduce a tension in the literature in which models that have aimed to match ...
Finance and Economics Discussion Series , Paper 2024-097

Working Paper
Home Country Interest Rates and International Investment in U.S. Bonds
Ammer, John; Claessens, Stijn; Wroblewski, Caleb; Tabova, Alexandra M. (2018-06-22)
We analyze how interest rates affect cross-border portfolio investments. Data on U.S. bond holdings by foreign investors from 31 countries for the period 2003 - 2016 and a large variety in movements in interest rates in these countries provide for a unique way to analyze shifts in investment behavior in response to interest rates. We find that low(er) interest rates, now prevailing in many advanced countries, lead to greater investment in general into the United States, with the effects generally driven by investment in (higher yielding) corporate bonds, rather than in Treasury bonds. In ...
International Finance Discussion Papers , Paper 1231

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