Yosef Bonaparte

Household Search Choice: Theory and Evidence

Since the work by Stigler (1961) on the economics of information in the early 1960s, economists have paid closer attention to the role of search for information. However, search methods are not considered in the theory of portfolio choice. We present a model of investor search behaviour in order to provide a framework by which to evaluate our empirical evidence on the role of search in portfolio selection and performance. We study two types of search methods: informal and professional. We show that the income, wealth and risk preference of households influence their search choice.

Estimating the Elasticity of Intertemporal Substitution with Household-Specific Portfolios

This paper estimates the Elasticity of Intertemporal Substitution (EIS) using household actual return. The approach is motivated by numerous data sources indicate that the median US stockholder has a portfolio contains three to four individual stocks, rather than a diverse bundle. Thus, representing individual household portfolio by a proxy financial index (which is the common approach taken in the literature) may be too rough an approximation and lead to biased results about risk aversion and intertemporal substitution. Eschewing the financial index methodology, our results show support for the standard representative agent assumption that there is a high degree of homogeneity in the EIS across households with different wealth levels. Our findings have implications for models that assess the comovement between consumption and return on stocks.

Representative and Heterogeneous Agents: Theory and Evidence

This paper analyzes the theoretical and empirical findings for representative and heterogeneous agents for a host of economic issues including market completeness, consumption growth variability, income risk, equilibrium interest rate, and welfare gains from eliminating a Real Business Cycle (RBC). We introduce three types of heterogeneity: state, preferences, and beliefs and show that in some cases the heterogeneous agent framework can be viewed as complementary to the representative agent, whereas in other cases it can be seen as a substitute.

Savings Selectivity Bias, Subjective Expectations, and Stock Market Participation

Studies of household stock market participation report low participation rates. The explanations cited are that the fixed costs associated with participation and high risk aversion discourage households from buying stocks. However, the low participation rate findings are unchallenged. We argue that because prior studies fail to recognize that not all households save, there exists a selection bias when estimating the household participation rate. After correcting for this selection bias, as well as accounting for the influence of subjective expectations on market participation, we show that the unconditional probability of participating in the stock market would increase twofold.

'Yes We Can' Invest: The Effect of President Obama on Portfolio Choice

We show that social changes, like the success of role models, affects household financial decisions. Specifically, President Obama is a role model for minorities. Minorities historically underinvest in equity, which contributes to the widening racial wealth gap. Obamas election in 2008 is a positive social change for minorities that should encourage investing. Indeed, post-2008 and compared to White Americans, minorities, have a higher propensity to increase risk tolerance and to increase allocations to risky assets and savings, a lower propensity to exit the market, and trade more often. Overall, we show that societal factors affect the racial stock ownership gap.

U.S. Presidents and Stock Market Performance: The Good, the Bad and the Useless

We present an econometric framework that estimate conjoined ‘fixed effect’ components to analyze the presidential puzzle, by separating party policy impact on the stock market from each president ability. Our methodology enable us to examine what drives the higher excess return under Democratic presidencies, whether it is Democratic policy or Democratic presidents’ abilities or both. Our results indicate that both parties policies have overall negative impact on the stock market, while Democratic policy is slightly more negative; Democratic presidents have greater ability than Republican counterparts. Furthermore, president ability impacts the stock market more than party policy, and both parties have fewer impact on large deciles. We then classify president based on their abilities and find that presidents LBJ/Clinton, Nixon and Carter/Eisenhower are the “Good”, the “Bad” and the “Useless” presidents, respectively. We believe these findings add new insight to the current debate of what party has a better policy, and suggest a small government would be an optimal political economy system. Collectively, our results show that we ought to separate between president’s party affiliation (policy) and the president’s ability when we study how politics influences financial markets.

Portfolio Choice and Asset Pricing with Investor Entry and Exit

We find that about 25% of stockholders enter/exit non-retirement investment accounts biennially. To examine this participation turnover, we estimate a canonical portfolio choice model. The estimation reveals that income risk and time costs to investing, estimated at 3.7% of income, affect the turnover in stock ownership. Further, the estimates of the coefficient of relative risk aversion and the discount factor are 3.176 and 0.963, respectively. Finally, the model implies that consumption CAPMs can perform better when focusing on investors who rarely exit the market because their consumption growth is the most volatile and the most correlated with market returns

CEO Turnover and Political Repositioning

This paper examines the relation between political regime change, a new president from a new party, and propensity for CEO turnover. Our key conjecture is that some companies, especially those that are politically sensitive, will politically reposition to adapt to the new political regime, and this political repositioning will be reflected in increased CEO turnover. We find support for this hypothesis, for CEO turnover is at least 24% more likely to happen following political regime change. The economic significance of this CEO political repositioning varies by company characteristics, with repositioning greater among large cap stocks, stocks held by short term investors, and sectors that are politically sensitive. However, political repositioning decreases stock performance relative to the sector, though this effect is weakly significant. These results suggest that political regime change causes firms to reevaluate the required skills of the CEO. Collectively, we find that political repositioning is an important determinant of CEO turnover.

Discrimination, Social Risk, and Portfolio Choice

This study examines whether social discrimination affects the risk perceptions and, subsequently, the investment decisions of individual investors. We conjecture that minority groups such as gays/lesbians, African Americans, and women, who are more likely to experience discrimination, over-estimate their risk exposures (i.e., they experience social risk) and invest more cautiously. Consistent with our conjecture, we find that minorities with high social risk participate less in the stock market and allocate a lower proportion of their wealth to risky assets. These results indicate that non-financial risks, such as social risk, influence financial risk-taking behavior of U.S. households.

Estimating the elasticity of intertemporal substitution accounting for stockholder-specific portfolios

ABSTRACT This article estimates the elasticity of intertemporal substitution using stockholder actual return experience. The approach is motivated by numerous data sources indicating that the median US stockholder has a portfolio composed of only three or four individual stocks, rather than a well-diversified portfolio as suggested by portfolio theory. Therefore, representing an individual stockholder portfolio by a proxy financial index (the common approach taken in the literature) may be too rough an approximation of investor behaviour and lead to biased results about risk aversion and intertemporal substitution. Eschewing the financial index methodology, our results support the standard representative agent assumption that there is a high degree of homogeneity in the elasticity of intertemporal substitution across stockholders with different wealth levels. Our findings have implications for models that assess the comovement between consumption and return on stocks.