Research / BFI Working PaperJan 24, 2019

Heterogeneous Households under Uncertainty

I characterize a dynamic economy under general distributions of households’ risk tolerance, endowments, and beliefs about long-term growth. As the economy expands and the stock market rises (a) the fraction of households with declining consumption-share increases; (b) the wealth-share of high risk-tolerant households increases; (c) richer households’ wealth display a higher CAPM beta; and (d) households’ portfolios change qualitatively. A log-utility investor for instance borrows in contractions but lends in expansions. Variations in uncertainty and expected growth generate trading volume due to risk sharing. Higher uncertainty increases stock prices, risk premiums, volatility, wealth inequality and the dispersion of portfolio holdings, consistently with the events in the late 1990s.

More Research From These Scholars

BFI Working Paper Feb 9, 2022

Is There an Industrial Land Discount in China? A Public Finance Perspective

Zhiguo He, Scott Nelson, Yang Su, Anthony Lee Zhang, Fudong Zhang
Topics:  Financial Markets
BFI Working Paper Mar 22, 2021

Sovereign Debt Ratchets and Welfare Destruction

Peter M. DeMarzo, Zhiguo He, Fabrice Tourre
Topics:  Fiscal Studies
BFI Working Paper May 13, 2020

Assessing the Payroll Protection Program: A Framework and Preliminary Results

John Barrios, Michael Minnis, William Minnis, Joost Sijthoff
Topics:  COVID-19, Employment & Wages