In the cross-section of households, the portfolio share rises in wealth and has a non-decreasing age profile. The standard life-cycle model with homothetic utility and non-tradable labor income has the counterfactual implication that the portfolio share falls in both wealth and age. We develop a life-cycle model in which households have nonhomothetic utility over two types of consumption goods,...

This paper examines the conditions required to guarantee positive prices in the CAPM. Positive prices imply an upper bound on the equity premium. This upper bound depends on the degree of diversity of firms’ fundamentals, and it is independent of investors’ preferences. In economies with realistically diverse assets the only positive-price CAPM equilibrium theoretically possible is a degenerate...

This study examines whether institutional investors’ voting for All-Star financial analysts is affected by analyst beauty. Using a sample of 1,135 U.S. analysts and controlling for analyst performance, we document that beauty, on average, does not affect the outcome of All-Star analyst voting. However, a beauty premium emerges in those sectors where there is high information asymmetry on analys...

Robust portfolio optimization has been developed to resolve the high sensitivity to inputs of the Markowitz mean-variance model. Although much effort has been put into forming robust portfolios, there have not been many attempts to analyze the characteristics of portfolios formed from robust optimization. We investigate the behavior of robust portfolios by analytically describing how robustness...

In this paper, we solve the intertemporal investment problem of an investor holding a portfolio of default-free and defaultable bonds. Default-risk is modeled in an intensity based framework with state variables following an a¢ne di¤usion. The structure of the optimal portfolio over time is investigated and compared to the static meanvariance portfolio. Furthermore, we describe the impact of ti...

The finance literature documents the relation between labor income and the crosssection of stock returns. A possible explanation is the hedging of investors with relative wealth concerns who pay a premium for securities that help them to keep up with their peers. Relative wealth concerns imply a local effect and a negative risk premium associated with the risk factor, since investors are willin...

Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles has ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative ass...

This paper examines the recent experience with insurance and other risk-financing instruments in developing countries in order to gain insights into the effectiveness of these instruments in reducing economic insecurity. Insurance and other risk financing strategies are viewed as efforts to recover from negative income shocks through risk pooling and transfer. Specific examples of public-privat...

The consensus wisdom of active mutual fund managers, as reflected in their average overand underweighting decisions, contains valuable information about future stock returns. Analyzing a comprehensive sample of active U.S. equity funds 1984—2008, we find that stocks heavily overweighted by active funds outperform their underweighted counterparts by more than 7% per year, after adjustments for t...

An experiment tested whether and in what circumstances people are more likely to believe an event simply because it makes them better off. Subjects observed a financial asset’s historical price chart, and received both an accuracy bonus for predicting the price at some future point, and an unconditional award that was either increasing or decreasing in this price. Despite incentives for hedging...