Direct Preference for Wealth in Aggregate Household Portfolios

Pascal St-Amour
2005 Social Science Research Network  
According to standard theory, wealth should have no intrinsic value. Yet, conventional wisdom, recent theories, and data suggest it might. We verify whether or not households have direct preferences over wealth in selecting assets. The fully structural econometric model focuses on a multivariate Brownian motion in optimal consumption, portfolios and wealth. Using aggregate portfolio data, we find that wealth (i) is directly valued, (ii) reduces marginal utility and (iii) reduces risk aversion,
more » ... hile we reject the HARA, and CRRA restrictions. Consequently, wealth-dependent utility generates a larger IMRS risk, justifying a larger, more predictable risk premium and a lower risk-free rate. JEL classification: G11, G12.
doi:10.2139/ssrn.683704 fatcat:qev7un7g6zcwrdfnbqrf5uigkq