Andreas Fagereng

Asset Market Participation and Portfolio Choice over the Life Cycle

We study the life cycle of portfolio allocation following for 15 years a large random sample of Norwegian households using error-free data on all components of households’ investments drawn from the Tax Registry. Both, participation in the stock market and the portfolio share in stocks, have important life cycle patterns. Participation is limited at all ages but follows a hump-shaped profile which peaks around retirement; the share invested in stocks among the participants is high and flat for the young but investors start reducing it as retirement comes into sight. Our data suggest a double adjustment as people age: a rebalancing of the portfolio away from stocks as they approach retirement, and stock market exit after retirement. Existing calibrated life cycle models can account for the first behavior but not the second. We show that incorporating in these models a reasonable per period participation cost can generate limited participation among the young but not enough exit from the stock market among the elderly. Adding also a small probability of a large loss when investing in stocks, produces a joint pattern of participation and of the risky asset share that resembles the one observed in the data. A structural estimation of the relevant parameters that target simultaneously the portfolio, participation and asset accumulation age profiles of the model reveals that the parameter combination that fits the data best is one with a relatively large risk aversion, small participation cost and a yearly large loss probability in line with the frequency of stock market crashes in Norway.

Heterogeneity and Persistence in Returns to Wealth

We provide a systematic analysis of the properties of individual returns to wealth using twelve years of population data from Norway’s administrative tax records. We document a number of novel results. First, during our sample period individuals earn markedly different average returns on their financial assets (a standard deviation of 14%) and on their net worth (a standard deviation of 8%). Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the financial wealth distribution increases the return by 3 percentage points - and by 17 percentage points when the same exercise is performed for the return to net worth. Fourth, wealth returns exhibit substantial persistence over time. We argue that while this persistence partly reflects stable differences in risk exposure and assets scale, it also reflects persistent heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.

Why do wealthy parents have wealthy children

Strong intergenerational associations in wealth have fueled a longstanding debate over why children of wealthy parents tend to be well off themselves. We investigate the role of family background in determining children’s wealth accumulation and investor behavior as adults. The analysis is made possible by linking Korean-born children who were adopted at infancy by Norwegian parents to a population panel data set with detailed information on disaggregated wealth portfolios and socio-economic characteristics. The mechanism by which these Korean- Norwegian adoptees were assigned to adoptive families is known and effectively random. We use the quasi-random assignment to estimate the causal effects from an adoptee being raised in one type of family versus another. Our findings show that family background matters significantly for children’s accumulation of wealth and investor behavior as adults, even when removing the genetic connection between children and the parents raising them. In particular, adoptees raised by wealthy parents are more likely to be well off themselves, whereas adoptees’ stock market participation and portfolio risk are increasing in the financial risk taking of their adoptive parents. The detailed nature of our data allows us to explore mechanisms, assess the generalizability of the lessons from adoptees, and compare our findings to results from behavioral genetics decompositions.

Imputing consumption from Norwegian income and wealth registry data

Data on consumption expenditure of the household is essential in a wide array of economic research. This includes both topics in micro as well as macroeconomics. However, obtaining a consistent and precise measure of household consumption has proven notoriously difficult. This paper documents a method for computing a longitudinal consumption measure for Norwegian households from administrative records of income and wealth. Expenditure surveys tend to suffer from limited sample sizes and underrepresentation of high-income households. Administrative data does not have such limitations and offers a much larger sample with better coverage of all household types. This is particularly useful for improving the measurement of heterogeneity in consumption behavior.

Debt and Household Consumption Responses

Norwegian households’ levels of housing wealth have since the banking crisis of the 90s become an ever more dominant part of households’ portfolios. Low interest rates and easy access to mortgages have contributed to both increasing house prices and the corresponding increase in household debt. A potential concern for policy makers is how these high debt levels will affect household consumption were the economy to experience a sudden shock, in form of higher unemployment, rising interest rates, falling house prices or a combination of the three. This memo provides an overview of the theoretical implications and the empirical literature on the effects of such shocks on consumption, with an emphasis on heterogeneous responses. We use Norwegian register data on income and wealth to impute measures of consumption for the population and explore differences in consumption rates to gauge the potential impact of such shocks in Norway. We study the role of debt for consumption and find support for the hypothesis that consumption expenditure growth is lower among households with high debt. Much of the leveling off in consumption growth after the crisis reflects a regular response by highly indebted households. Still, a somewhat stronger relationship after the crisis shows that precautionary savings may have played a role.

Portfolio Choices, Firm Shocks, and Uninsurable Wage Risk

Assessing the importance of uninsurable wage risk for individual financial choices faces two challenges. First, the identification of the marginal effect requires a measure of at least one component of risk that cannot be diversified or avoided. Moreover, measures of uninsurable wage risk must vary over time to eliminate unobserved heterogeneity. Second, evaluating the economic significance of risk requires knowledge of the size of all the wage risk actually faced. Existing estimates are problematic because measures of wage risk fail to satisfy the ”non-avoidability” requirement. This creates a downward bias which is at the root of the small estimated effect of wage risk on portfolio choices. To tackle this problem we match panel data of workers and firms and use the variability in the profitability of the firm that is passed over to workers to obtain a measure of uninsurable risk. Using this measure to instrument total variability in individual earnings, we find that the marginal effect of uninsurable wage risk is much larger than estimates that ignore endogeneity. We bound the economic impact of risk and find that its overall effect is contained, not because its marginal effect is small but because its size is small. And the size of uninsurable wage risk is small because firms provide substantial wage insurance.