Diss. Stockholm : Handelshögskolan, 2007.

Diss. Stockholm : Handelshögsk., 2004.

Some studies have shown that managers concentrate large fractions of their wealth in the equity of their own firm. In this paper we use a unique dataset and investigate how Swedish owner-managers invest remaining wealth conditional on a major investment in their own firm. We find no[JR1] evidence that owner-managers seek diversification benefits when they invest remaining wealth. Instead some owner-managers invest remaining wealth in the industry where they already have a substantial capital investment. We conclude that some owner-managers seek to exploit their industry-specific superior information when they invest wealth not tied up in their own firms. / <p>QC 20130515</p>

This dissertation is composed of three papers that shed light on the stock-market participation puzzle. The first article studies different aspects of the participation of Spanish households in the stock market. I start by analyzing the determinants of stockholding in a reduced form setting, quantifying the importance of different socioeconomic variables on the decision to hold stock. This is complemented by a comparison with US stocking-holding behavior, especially that of highly sophisticated households who might be expected to participate fully in the market. The second article develops and estimates a full consumption and portfolio-choice life-cycle model to help explain the behavior uncovered in the first article. This model includes a fixed cost for participation in the stock and produces empirically sensible simulations of households' stock-holding patterns by age. It shows the powerful effect that the fixed cost has in explaining the non-participation issue. Moreover, using data from Spanish households I estimate this fixed cost. The third article, co-authored with Michael Ehrmann, breaks away from classic models and delves into the importance of considering more behavioural or psychological issues to explain this puzzle. In particular, we look at the effect of past macroeconomic experiences on the households' portfolio choice and risk-taking behaviour. We find that the average stock market return experienced by a household through its life time has a significant effect on its decision to hold stock. Moreover, disastrous events such as stock market crashes remain in people's minds and deter them from investing for a long period after the event happened.

<p>This dissertation addresses three key issues in international finance and economics: the uncovered interest rate parity puzzle in exchange rates, the home bias puzzle in portfolio allocations, and the surprising lack of correlation between terms of trade shocks and output in small open economies. </p><p>The first chapter shows that the much-studied Uncovered Interest Rate Parity (UIP) puzzle, the observation that exchange rates do not adjust sufficiently to offset interest rate differentials, is more complicated than commonly understood. I show that the puzzle changes nature with the horizon. I confirm existing short-run evidence that high interest rate currencies depreciate less than predicted by the interest rate differential. But, building on Engel (2012), at longer horizons (4 to 7 years) I find a reverse puzzle: high interest rate currencies depreciate too much. Interestingly, the long-horizon excess depreciation leads exchange rates to converge to the UIP benchmark over the long-run. To address the changing nature of the puzzle, I propose a novel model, based on the mechanism of bond convenience yields, that can explain both the short and the long horizon UIP violations. I also provide direct empirical evidence that supports the mechanism. </p><p>In chapter 2, I address the puzzling observation that portfolios are concentrated in asset classes which comove strongly with the non-financial income of investors. As an explanation, I propose a framework of endogenously generated information asymmetry, where rational agents optimally choose to focus their limited attention on risk factors that drive both their non-financial income and some of the risky asset payoffs. In turn, the agents concentrate their portfolios in assets driven by those endogenously familiar factors. I explore an uncertainty structure that implies decreasing returns to information, whereas the previous literature has focused on a setup with increasing returns. I show that the two frameworks have differing implications, which I test in the data and find support for decreasing returns to information. </p><p>In chapter 3, I address the puzzling lack of correlation between Terms of Trade (ToT) and the Small Open Economy (SOE) GDP. A SOE model typically relies on three sources of exogenous disturbances: world real interest rate, Terms of Trade (ToT) and technology. However, the empirical literature has failed to reach a consensus on the relative importance of the terms of trade as a driver of business cycles, with some papers claiming they are hugely important while others find no evidence of a relationship at all. Kehoe and Ruhl (2008) have recently shown that the weak empirical link between ToT and the GDP might be due to measurement limitations with the output series in an open economy framework. This paper merges data on national accounts with data on global trade flows for a panel of 31 countries and finds that Terms of Trade have a negligible effect on GDP but a strong effect on aggregate consumption. The evidence supports the hypothesis that ToT are important drivers of business cycles, but measurement issues with GDP obscure their relationship with real output. This further suggests that researchers should be careful when equating model output with measured GDP in an open economy setup.</p> / Dissertation

<p>This dissertation consists of two essays on household portfolio choice. The first essay is entitled 'Household Portfolio Choice and Retirement'. In this first essay, I empirically examine the portfolio decisions of households as they transition into retirement. I document a novel stylized fact: holding household characteristics constant, singles maintain a relatively constant share of risky assets in their financial portfolios as they transition into retirement. On the other hand, couples decrease their share of risky assets significantly. I analyze this difference in behavior, and show that it is not driven by retirement-related background risks for couples relative to singles. Instead, I show that the heterogeneity within couples can be explained by the within-couple difference in spouses' individual risk aversion levels, and that the results are consistent with a net increase in couples' effective household-level risk aversion after retirement. Further, exploiting heterogeneity in couples' relative retirement dates, I show that husbands' and wives' respective retirement events are associated with very different (opposite-signed) persistent effects on the risky share of couples' portfolios. Moreover, I show that the relative magnitude of these persistent effects is consistent with the importance of each spouse's labor income within the household before retirement. Overall, the evidence is consistent with the outcome of a household bargaining game in which wives demand a smaller share of risky assets than their husbands, with each spouse losing some bargaining power after retiring.</p><p>In the second essay, entitled 'Household Bargaining and Asset Allocation', we empirically examine the effect of intra-household bargaining on household portfolio choice over the life cycle. We find that fluctuations in the distribution of intra-household bargaining power are associated with significant asset allocation shifts between risky and comparatively safer asset classes in households' portfolios. Our results are robust to alternative risky asset definitions, including investments in stocks, real estate, and holdings in private business, as well as to alternative control specifications. We find that the implied effect of intra-household bargaining is economically large in magnitude, with changes in bargaining power driving within-household variation in risky asset shares comparable to changes in labor income and wealth over the life cycle.</p> / Dissertation

This thesis is composed of three chapters. The first two chapters provides novel approaches for modeling and estimating the dependence structure for a large portfolio of assets using rating data. In both chapters a natural form of organizing a portfolio in terms of the levels of exposure to economic sectors and geographical regions, plays a key role in setting up the dependence structure. The last chapter investigates weather financial strategies that exploit sector or geographical heterogeneity in the asset space are relevant in terms of portfolio optimization. This is also done in a context of a large portfolio but with data on stock returns.

This dissertation addresses three issues in international macroeconomics. The first chapter examines optimal portfolio decisions in a monetary open economy DSGE model. In a complete market environment, Engel and Matsumoto (2005) find that sticky price can generate equity home bias. However, their result is sensitive to the structure of the financial market. In an incomplete market environment, we find “super home bias” in the equilibrium equity portfolio, which casts doubt on the ability of sticky price in describing the observed equity portfolios. We further show that introducing sticky wages helps to match the data. The second chapter analyzes the welfare impact of financial integration in a standard monetary open-economy model. Financial integration may have negative effects on welfare if integration occurs in the presence of nominal price rigidities and constraints on the efficient use of monetary policy. The reason is that financial integration leads to excessive terms of trade volatilities. From a policy perspective, the model implies that developing economies that are experiencing financial integration may attempt to alleviate the welfare cost of integration by stabilizing the exchange rate. This prediction is consistent with the widespread reluctance to following freely floating exchange rates among these economies. On the other hand, for advanced economies that have the ability to operate efficient inflation targeting monetary policies, financial integration is always beneficial. Thus, the model accounts for the observed acceleration in cross-border asset trade among advanced economies in the early 1990s as it was mainly the industrial countries that switched to an inflation targeting regime at the time. The third chapter uses an open-economy neoclassical growth model to explain the saving and investment behavior of the U.S. and a group of other OECD countries. We find that while the model explains investment quite well, it tends to overpredict U.S saving and underpredict saving in the rest of the world. We show that the closed-economy version of the model also predicts saving accurately but that is only because it imposes equality between saving and investment. In effect, the model explains investment not saving behavior.

<p>Actively managed mutual funds underperform the index and investors are recommended to invest in index funds since they give higher returns (Dagens Industri Debatt, 2010). In this thesis it is investigated if partly indexated portfolios with randomly selected stocks beat the benchmark index and thus are a valid option of portfolio construction for the individual investor. For this purpose sixteen portfolios are constructed partly by an index and partly by randomly selected stocks from the Swedish stock market in the time period of 2007.01.01 to 2010.01.01. Risk and return measures are used in order to analyse if the portfolios beat the benchmark index. The results are also compared to an index mutual fund in order to validate the results further.</p><p>The results suggest that partly indexated portfolios with randomly selected stocks are able to outperform both the benchmark index and the comparing index mutual fund. When dividends were included in the portfolios all of the sixteen portfolios had beaten the benchmark index. The two stock portfolio is a valid alternative when investing in mutual funds since it has superior returns with only marginally higher risk than the benchmark index.</p>

I develop a numerical method that combines functional approximations and dynamic programming to solve high-dimensional discrete-time stochastic control problems under general constraints. The method relies on three building blocks: first, a quasi-random grid and the radial basis function method are used to discretize and interpolate the high-dimensional state space; second, to incorporate constraints, the method of Lagrange multipliers is applied to obtain the first order optimality conditions; third, the conditional expectation of the value function is approximated by a second order polynomial basis, estimated using ordinary least squares regressions. To reduce the approximation error, I introduce the test region iterative contraction (TRIC) method to shrink the approximation region around the optimal solution. I apply the method to two Finance applications: a) dynamic portfolio choice with constraints, a continuous control problem; b) dynamic portfolio choice with capital gain taxation, a high-dimensional singular control problem. / text