The Choice Channel of Financial Innovation

78 Pages Posted: 2 Nov 2015

See all articles by Felipe Iachan

Felipe Iachan

FGV

Plamen Nenov

BI Norwegian Business School

Alp Simsek

Massachusetts Institute of Technology (MIT) - Department of Economics; 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

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Alp Simsek

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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The Morris and Sophie Chang Building
Cambridge, MA 02142
United States
617-2585630 (Phone)

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

National Bureau of Economic Research (NBER) ( email )

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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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