Who Hedges Interest-rate Risk? Implications for Wealth Inequality

59 Pages Posted: 2 Jun 2022 Last revised: 28 Jul 2022

See all articles by Sylvain Catherine

Sylvain Catherine

University of Pennsylvania - Finance Department

Max Miller

University of Pennsylvania, The Wharton School, Finance Department

James D. Paron

University of Pennsylvania - Finance Department

Natasha Sarin

Yale University Law School and Yale School of Management

Date Written: May 23, 2022

Abstract

We present a life-cycle model in which households can invest in short- or long-term assets to hedge against interest-rate risk. Our model matches important stylized facts. First, the share of long-term assets in households' wealth is hump-shaped over the life-cycle. Within cohorts, it increases with wealth and earnings. Second, wealth inequality grows when interest rates fall, but only when wealth does not include the value of Social Security. Hedging demand against interest-rate risk can explain 40% of long-run changes in wealth inequality since 1960.

Keywords: Interest rates, Portfolio choices, Inequality, Social Security

JEL Classification: D31, E21, G51, H55

Suggested Citation

Catherine, Sylvain and Miller, Max and Paron, James and Sarin, Natasha, Who Hedges Interest-rate Risk? Implications for Wealth Inequality (May 23, 2022). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=4117856 or http://dx.doi.org/10.2139/ssrn.4117856

Sylvain Catherine (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Max Miller

University of Pennsylvania, The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

James Paron

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
2892590613 (Phone)
19104 (Fax)

Natasha Sarin

Yale University Law School and Yale School of Management ( email )

127 Wall St.
New Haven, CT 06511
United States
2034325552 (Phone)
20001-4959 (Fax)

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