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The Choice Channel of Financial Innovation

Felipe Iachan (), Plamen T. Nenov and Alp Simsek

American Economic Journal: Macroeconomics, 2021, vol. 13, issue 2, 333-72

Abstract: Financial innovation in recent decades has expanded portfolio choice. We investigate how greater choice affects investors' savings and asset returns. We establish a choice channel by which greater portfolio choice increases investors' savings—by enabling them to earn the aggregate risk premium or take speculative positions. In equilibrium, portfolio customization (access to risky assets beyond the market portfolio) reduces the risk-free rate. Participation (access to the market portfolio) reduces the risk premium but typically increases the risk-free rate. Empirically, stock market participants in the United States save more than nonparticipants and have increasingly dispersed portfolio returns, consistent with the choice channel.

JEL-codes: E21 G11 G12 G51 (search for similar items in EconPapers)
Date: 2021
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Working Paper: The Choice Channel of Financial Innovation (2020) Downloads
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DOI: 10.1257/mac.20180429

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