Limited Risk Transfer Between Investors: A New Benchmark for Macro-Finance Models

Xavier Gabaix, Ralph Koijen, Federico Mainardi, Sangmin Simon Oh and Motohiro Yogo

No 33336, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We define risk transfer as the percent change in the market risk exposure for a group of investors over a given period. We estimate risk transfer using novel data on U.S. investors' portfolio holdings, flows, and returns at the security level with comprehensive coverage across asset classes and broad coverage across the wealth distribution (including 400 billionaires). Our key finding is that risk transfer is small with a mean absolute value of 0.65% per quarter. Leading macro-finance models with heterogeneous investors predict risk transfer that exceeds our estimate by a factor greater than ten because investors react too much to the time-varying equity premium. Thus, the small risk transfer is a new moment to evaluate macro-finance models. We develop a model with inelastic demand, calibrated to the standard asset pricing moments on realized and expected stock returns, that explains the observed risk transfer. The model is adaptable to other macro-finance applications with heterogeneous households.

JEL-codes: E7 G1 G4 G5 (search for similar items in EconPapers)
Date: 2025-01
New Economics Papers: this item is included in nep-fmk and nep-rmg
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