Creator: Koijen, Ralph S. J., Nieuwerburgh, Stijn van, and Yogo, Motohiro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 499 Abstract:
We develop a pair of risk measures, health and mortality delta, for the universe of life and health insurance products. A life-cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products. We estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance, annuities including private pensions, and long-term care insurance in the Health and Retirement Study. For the median household aged 51 to 57, the lifetime welfare cost of market incompleteness and suboptimal choice is 3.2% of total wealth.
Keyword: Portfolio choice, Annuities, Life insurance, Health insurance, and Life-cycle model Subject (JEL): I13 - Health Insurance, Public and Private, D91 - Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, G11 - Portfolio Choice; Investment Decisions, and D14 - Household Saving; Personal Finance
Creator: Koijen, Ralph S. J. and Yogo, Motohiro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 510 Abstract:
We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies characteristics-based demand when returns have a factor structure and expected returns and factor loadings depend on the assets' own characteristics. We propose an instrumental variables estimator for the characteristics-based demand system to address the endogeneity of demand and asset prices. Using U.S. stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.
Keyword: Liquidity, Institutional investors, Asset pricing model, Demand system, and Portfolio choice Subject (JEL): G12 - Asset Pricing; Trading Volume; Bond Interest Rates and G23 - Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors