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The Choice Channel of Financial Innovation

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

No 14361, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 to 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 U.S. save more than nonparticipants, and have increasingly dispersed portfolio returns, consistent with the choice channel.

Keywords: belief disagreements; Customization; financial innovation; interest rate; Risk premium; Savings; Speculation; Stock Market Participation (search for similar items in EconPapers)
JEL-codes: E21 E43 E44 G11 G12 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-mac
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Journal Article: The Choice Channel of Financial Innovation (2021) Downloads
Working Paper: The Choice Channel of Financial Innovation (2015) Downloads
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