Direct Preference for Wealth in Aggregate Household Portfolio

St-Amour, Pascal

Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) from Université de Lausanne, Faculté des HEC, DEEP

Abstract: According to standard theory, wealth should have no intrinsic value. Yet, conventional wisdom, recent theories, and data suggest it might. We verify whether or not households have direct preferences over wealth in selecting assets. The fully structural econometric model focuses on a multivariate Brownian motion in optimal consumption, portfolios and wealth. Using aggregate portfolio data, we find that wealth (i) is directly valued, (ii) reduces marginal utility and (iii) reduces risk aversion, while we reject the HARA, and CRRA restrictions. Consequently, wealth-dependent utility generates a larger IMRS risk, justifying a larger, more predictable risk premium and a lower risk-free rate.

Keywords: portfolio choice; wealth-dependent preferences; preference for status; asset pricing; equity premium; risk-free rate; predictability (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-fin
Date: 2005-03
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