Direct Preference for Wealth in Aggregate Household Portfolios

FAME Research Paper No. 136

49 Pages Posted: 7 Apr 2005

See all articles by Pascal St-Amour

Pascal St-Amour

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Swiss Finance Institute

Date Written: March 2005

Abstract

According to standard theory, wealth should have no intrinsic value. Yet, conventional wisdom, recent theories, and data suggest it might. We verify whether or not households have direct preferences over wealth in selecting assets. The fully structural econometric model focuses on a multivariate Brownian motion in optimal consumption, portfolios and wealth. Using aggregate portfolio data, we find that wealth (i) is directly valued, (ii) reduces marginal utility and (iii) reduces risk aversion, while we reject the HARA, and CRRA restrictions. Consequently, wealth-dependent utility generates a larger IMRS risk, justifying a larger, more predictable risk premium and a lower risk-free rate.

Keywords: Portfolio choice, Wealth-dependent preferences, Preference for status, Asset pricing, Equity premium, Risk-free rate, Predictability

JEL Classification: G11, G12

Suggested Citation

St-Amour, Pascal, Direct Preference for Wealth in Aggregate Household Portfolios (March 2005). FAME Research Paper No. 136. Available at SSRN: https://ssrn.com/abstract=683704 or http://dx.doi.org/10.2139/ssrn.683704

Pascal St-Amour (Contact Author)

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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