The Choice Channel of Financial Innovation

77 Pages Posted: 7 Feb 2020

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: January 20, 2020

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.

Keywords: Belief Disagreements, Speculation, Financial Innovation, Savings, Interest Rate, Risk Premium, Customization, Stock Market Participation

JEL Classification: E21, E43, E44, G11, G12

Suggested Citation

Iachan, Felipe and Nenov, Plamen and Simsek, Alp, The Choice Channel of Financial Innovation (January 20, 2020). Available at SSRN: https://ssrn.com/abstract=3523216 or http://dx.doi.org/10.2139/ssrn.3523216

Felipe Iachan

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 (Contact Author)

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

50 Memorial Drive E52-552
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 )

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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