The Choice Channel of Financial Innovation
Felipe Iachan (),
Plamen T. Nenov and
No 14361, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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)
New Economics Papers: this item is included in nep-mac
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Journal Article: The Choice Channel of Financial Innovation (2021)
Working Paper: The Choice Channel of Financial Innovation (2015)
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