Investment Losses and Inequality

Abstract

Systematic differences along the wealth distribution in investment performance will potentially have large consequences for the level and persistence of wealth inequality. These differences in performance are hard to measure except in a few, select countries with detailed information on household portfolios. In this paper we use a modified version of the Global Capital Asset Pricing Model (GCAPM), which relies on classed household portfolio data to measure investment performance in five European countries, where previously no measure of investment performance could be computed. We verify the accuracy of the modified GCAPM using Dutch survey data, which contains unclassed portfolio data enabling direct comparison with the regular GCAPM. In all countries households with less wealth exhibit lower investment performance, even after risk-adjustment. Further, we show that raising investment performance creates large efficiency gains, however, households below the median do not benefit from them.

Keywords: Capital Asset Pricing, Household Portfolios, Inequality, Investment Behavior

JEL Classification: D12, D14, D31, G11