Veronica Rappoport

Risk aversion and wealth: evidence from person-to-person lending portfolios

We estimate risk aversion from the actual financial decisions of 2,168 investors in Lending Club (LC), a person-to-person lending platform. We develop a methodology that allows us to estimate risk aversion parameters from each portfolio choice. Since the same individual makes repeated investments, we are able to construct a panel of risk aversion parameters that we use to disentangle heterogeneity in attitudes towards risk from the elasticity of investor-specific risk aversion to changes in wealth. In the cross section, we find that wealthier investors are more risk averse. Using changes in house prices as a source of variation, we find that investors become more risk averse after a negative wealth shock. These preferences consistently extrapolate to other investor decisions within LC.

Risk Aversion and Wealth: Evidence from Person-to-Person Lending Portfolios

We estimate risk aversion from investors’ financial decisions in a person-to-person lending platform. We develop a method that obtains a risk-aversion parameter from each portfolio choice. Since the same individuals invest repeatedly, we construct a panel data set that we use to disentangle heterogeneity in attitudes toward risk across investors, from the elasticity of risk aversion to changes in wealth. We find that wealthier investors are more risk averse in the cross section and that investors become more risk averse after a negative housing wealth shock. Thus, investors exhibit preferences consistent with decreasing relative risk aversion and habit formation.Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2015.2317 . This paper was accepted by Amit Seru, finance .

Trade-off Between International and Domestic Risk Sharing in the Presence of Sovereign Risk

This paper analyzes how sovereign risk affects governments ability to smooth domestic risk when policy tools imperfectly discriminate foreign and domestic agents. The government cannot choose to pay differently foreign and domestic bond holders; however it can imperfectly discriminate against foreign investors by reducing overall debt payments and lowering domestic tax burden accordingly. This paper shows that, in an overlapping generations economy with privately observable idiosyncratic risk, this distortion results in excessive consumption inequality in the cross-section of domestic agents and excessive consumption volatility in the time series. Opening the capital account enables international risk sharing, but also introduces this governments distortion. Its overall effect on consumption risk is therefore ambiguous.