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Discussion Paper Details

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Title: The Choice Channel of Financial Innovation

Author(s): Felipe Saraiva Iachan, Plamen T. Nenov and Alp Simsek

Publication Date: January 2020

Keyword(s): belief disagreements, Customization, financial innovation, interest rate, Risk premium, Savings, Speculation and Stock Market Participation

Programme Area(s): Financial Economics, Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: Financial innovation in recent decades has expanded portfolio choice. We investigate how greater choice affects investors' savings and asset returns. We establish a choice channel by which greater portfolio choice increases investors' savings---by enabling them to earn the aggregate risk premium or to take speculative positions. In equilibrium, portfolio customization (access to risky assets beyond the market portfolio) reduces the risk-free rate. Participation (access to the market portfolio) reduces the risk premium but typically increases the risk-free rate. Empirically, stock market participants in the U.S. save more than nonparticipants, and have increasingly dispersed portfolio returns, consistent with the choice channel.

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Bibliographic Reference

Iachan, F, Nenov, P and Simsek, A. 2020. 'The Choice Channel of Financial Innovation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14361