BA-FI1: Financial Intermediation: Portfolio Choice
Dynamic Asset Allocation with Relative Wealth Concerns in Incomplete Markets
1Goethe Universiät; 2Universität Trier
In dynamic portfolio choice problems, stochastic state variables such as
stochastic volatility lead to adjustments of the optimal stock demand referred to
as hedge terms or Merton-Breeden terms. By deriving an explicit solution in a
multi-agent framework with a stochastic opportunity set, we show that relative
wealth concerns give rise to new hedge terms beyond the ordinary ones. This is
because the agents hedge against both exogenous changes in the state variable
and endogenous decisions of the other agent. Depending on the parametrization
of the model, these new terms can significantly change the investors’ hedging
demands. We also show that both heterogeneity in risk aversion or relative
wealth concerns can have similar effects on the heterogeneity in portfolio deci-
sions. Formally, we study a non-cooperative, non-zero sum stochastic differential
game for which we prove a verification theorem in a setting with an unspanned
Automated Portfolio Rebalancing: Automatic Erosion of Investment Performance?
Otto-Friedrich-Universität Bamberg, Deutschland
Robo-advisers enable investors to establish an automated rebalancing-strategy for a portfolio usually consisting of stocks and bonds. Since households’ portfolios additionally include further frequently tradable assets like real estate funds, articles of great value, and cash(-equivalents), we analyze whether households would benefit from a service that automatically rebalances a portfolio which additionally includes the latter assets. In contrast to previous studies, this paper relies on real-world household portfolios which are derived from the German central bank’s (Deutsche Bundesbank) Panel on Household Finances (PHF)-Survey. We compute the portfolio performance increase/decrease that households would have achieved by employing rebalancing strategies instead of a buy-and-hold strategy in the period from September 2010 to July 2015 and analyze whether subsamples of households with certain sociodemographic and socioeconomic characteristics would have benefited more from portfolio rebalancing than other household subsamples. The empirical analysis shows that the analyzed German households would not have benefited from an automated rebalancing service and that no subgroup of households would have significantly outperformed another subgroup in the presence of rebalancing strategies.
Implications of Money-Back Guarantees for Individual Retirement Accounts: Protection Then and Now
1Goethe University Frankfurt; 2Wharton School, University of Pennsylvania
In the wake of the financial crisis and continued volatility in international capital markets, there is growing interest in mechanisms that can protect people against retirement account volatility. This paper explores the consequences for savers’ wellbeing of implementing market-based retirement account guarantees, using a life cycle consumption and portfolio choice model where investors have access to stocks, bonds, and tax-qualified retirement accounts. We evaluate the case of German Riester plans adopted in 2002, an individual retirement account produce that includes embedded mandatory money-back guarantees. These guarantees influenced participant consumption, saving, and investment behavior in the higher interest rate environment of that era, and they have even larger impacts in a low-return world such as the present. Importantly, we conclude that abandoning these guarantees could enhance old-age consumption for over 80% of retirees, particularly lower earners, without harming consumption during the accumulation phase. Our results are of general interest for other countries implementing default investment options in individual retirement accounts, such as the U.S. 401(k) defined contribution plans and the Pan European Pension Product (PEPP) recently launched by the European Parliament.