Direct Preference for Wealth in Aggregate Household Portfolios
FAME Research Paper No. 136
49 Pages Posted: 7 Apr 2005
Date Written: March 2005
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: Suggested Citation