What Drives Variation in Investor Portfolios? Estimating the Roles of Beliefs and Risk Preferences
60 Pages Posted: 20 Dec 2021 Last revised: 4 Apr 2023
Date Written: April 4, 2023
We present an empirical model of portfolio choice that allows for nonparametric estimation of investors' (subjective) expectations and risk preferences. Using a comprehensive dataset of 401(k) plans from 2009 through 2019, we explore the heterogeneity in asset allocations across plans using our empirical framework. Our estimates indicate that differences in expectations play a first-order role in explaining portfolios. We also show that investors appear to form expectations based on local sources of information such as county-level GDP growth and employer past performance. Overall, our findings are consistent with a model in which heterogeneity in investor expectations reflects idiosyncratic experiences and local environments.
Keywords: Stock Market Expectations, Demand Estimation, Portfolio Choice, 401(k)
JEL Classification: G11, G12, G40, G51, J32, D14
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