Can Security Design Solve Household Reluctance to Take Risk?

77 Pages Posted: 2 Nov 2019

See all articles by Laurent E. Calvet

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

Claire Celerier

University of Toronto - Rotman School of Management

Paolo Sodini

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Boris Vallee

Harvard Business School - Finance Unit

Date Written: October 23, 2019

Abstract

Using a comprehensive administrative panel of Swedish households, we show how the introduction of capital protected investments and their broad adoption lead to a significant increase in exposure to stock markets for a large share of the population. This effect is significantly more pronounced for households exhibiting a high reluctance to take financial risk before innovation. To rationalize our empirical findings, we develop a lifecycle model and confront a set of utility functions to the data. We find that first order risk aversion with narrow framing (Barberis and Huang 2009) can explain both the increase in the risky share and the heterogeneity we empirically observe. Our results illustrate how security design can mitigate household reluctance to take financial risk.

Keywords: Financial innovation, household finance, capital protected investment, behavioral biases, stock market participation, risk-taking

JEL Classification: I22, G1, D18, D12

Suggested Citation

Calvet, Laurent E. and Celerier, Claire and Sodini, Paolo and Vallee, Boris, Can Security Design Solve Household Reluctance to Take Risk? (October 23, 2019). Available at SSRN: https://ssrn.com/abstract=3474645 or http://dx.doi.org/10.2139/ssrn.3474645

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Claire Celerier (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Paolo Sodini

Stockholm School of Economics - Department of Finance ( email )

Sveavagen 65, Box 6501
SE-113 83 Stockholm
Sweden
46 8 7369165 (Phone)
46 8 312327 (Fax)

HOME PAGE: http://www.hhs.se/secfi/People/Faculty/Finpso/finp

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Boris Vallee

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

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