The Choice Channel of Financial Innovation

78 Pages Posted: 2 Nov 2015 Last revised: 3 Apr 2023

See all articles by Felipe Iachan

Felipe Iachan

FGV

Plamen Nenov

Norges Bank - Research Department; BI Norwegian Business School

Alp Simsek

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2015

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.

Suggested Citation

Iachan, Felipe and Nenov, Plamen and Simsek, Alp, The Choice Channel of Financial Innovation (October 2015). NBER Working Paper No. w21686, Available at SSRN: https://ssrn.com/abstract=2684990

Felipe Iachan (Contact Author)

FGV ( email )

Praia de Botofogo, 190
Rio de Janeiro, RJ 22411-060
Brazil

Plamen Nenov

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Alp Simsek

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511

HOME PAGE: http://https://som.yale.edu/faculty/alp-simsek

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://https://economics.mit.edu/faculty/asimsek

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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