CEPR European Conference on Household Finance 2020: Summary

CEPR European Conference on Household Finance

Report on the 2020 Edition

By Yigitcan Karabulut
Frankfurt School of Finance and Management and CEPR

The 2020 edition of the CEPR European Conference on Household Finance, held with the support of the Think Forward Initiative (TFI), took place online between 9 and 11 September 2020. This summary describes the main themes emerging from the papers presented at the conference.

On 9-11 September 2020, The CEPR Network on Household Finance hosted the 2020 edition of CEPR European Conference on Household Finance. It was organized by the CEPR Network on Household Finance, together with the BI Norwegian Business School, and the Think Forward Initiative. The local organizer for this edition was Samuli Knüpfer. Due to the global imposition of various lockdown measures in response to the outbreak of the Covid-19 pandemic, the conference was held as an online webinar.

The Network runs the European Conference on Household Finance in the autumn of each year since 2015, with its origins back to 2010, alongside its Spring Workshop launched in 2016. The typical volume of submissions to the conference is about 150 papers, with an acceptance rate of about 8%. During each year’s conference and workshop, the Think Forward Initiative and CEPR organize a discussion around issues of topical interest. This edition’s event was organized by Johannes Stroebel and focused on “Climate Change: Financial Implications for Households”. This summary presents the main themes that emerged from papers presented at the conference.

 

Social Norms, Trust, and Household Financial Behavior

Social norms on gender roles can have important effects on household finances, particularly if the economic decision making power is assigned to the household members based on gender-biased norms rather than on skill or knowledge. Guiso and Zaccaria (2020) study the effect of gender norms on household financial behavior, and document a significant shift in household financial decision-making power from men to women over the past two decades. Using variation of social norms across cohorts and regions, the authors further document that less male-biased norms have a positive effect on stock market participation, equity share and portfolio diversification, which in turn increases returns from financial investments.

Similar to social norms, existing literature documents that social capital, in particular, trust plays an essential role in financial markets and household financial behavior. In his paper, Yang (2020) studies the potential role of trust in banks in the FinTech adoption across the U.S. regions. Using the revelation of the Wells Fargo scandal as a negative shock to trust in banks, the author documents that households living in regions with a higher exposure to the Wells Fargo scandal are more likely to use FinTech as a mortgage originator due to erosion of trust in banks. Yang (2020) further documents that this effect is more pronounced when people have low ex-ante trust in banks and high trust in media.

 

Housing and Mortgage Markets

Ever since the Great Recession, there has been a growing interest both from policymakers and academics to better understand the functioning of the housing and mortgage markets. Mabille (2020) studies how delayed home ownership from young buyers affects the transmission of shocks to housing markets. Using a panel of U.S. metro areas, the author first documents that mortgage originations to young buyers have decreased more in regions with higher house prices over the past 15 years, despite credit standards changing mostly at the national level. He further develops and calibrates a regional business cycle model of the cross-section of housing markets consistent with the empirical evidence. Since young buyers have more debt, and credit constraints bind more in high-price regions, an aggregate tightening of loan-to-value and payment-to-income requirements generates heterogeneous local responses in home ownership and prices, which explains 86% of the cross-sectional differences in originations and 50% of the differences in house price declines in the 2007-12 period.

In her paper, using detailed loan-level data, Tzur-Ilan (2020) analyzes the effects of introduction of loan-to-value (LTV) limits in Israel on loan terms and the borrower behavior in the housing market. The author documents that the LTV limits increase interest rates and reduce loan amounts and lead affected borrowers to choose more affordable housing units, which are farther from the central business districts and are in lower socioeconomic neighborhoods. Overall, the analysis reveals that the macroprudential policies, which focus on the stability of the financial system, can have micro implications for the housing market.

There is also a budding literature that analyzes the effects of climate change and natural disasters on the housing and mortgage markets. Using a comprehensive data set of houses and mortgages in California, Issler, Stanton, Vergara-Alert, and Wallace (2020) document a significant increase in mortgage default and foreclosure in the event of wildfire, but more surprisingly, these effects tend to decrease in the size of the wildfire. The authors argue that the latter effect arises from the coordination externalities afforded by large fires, whereby county requirements to rebuild to current building codes work with casualty-insurance-covered losses to ensure that the rebuilt homes will be modernized, and hence more valuable than the pre-fire stock of homes.

 

Household Portfolios, Household Wealth, and Wealth Inequality

Recent influential work indicates that wealth inequality has been rising substantially over the past three decades, based on measures of wealth concentration that exclude the value of social insurance programs. In their paper, Catherine, Miller, and Sarin (2020) revisit this conclusion for the U.S. by incorporating Social Security retirement benefits into measures of wealth inequality. They show that top wealth shares have not increased, once the old age retirement program is properly accounted for. The authors estimate that Social Security wealth represents more than half of the wealth of households in the bottom 90% of the wealth distribution, and conclude that progressive programs like Social Security represent the main source of savings for most Americans.

Baker, Johnson, and Kueng (2020) study whether and how household inventory management can affect the portfolio decisions of households. The authors demonstrate that US households can earn high returns from strategic shopping (sales) and optimally managing the inventories of consumer goods (bought in bulk) at low levels of inventory, such that marginal returns to inventory management dominate stock market returns. While returns are high at low levels of inventory, the returns decline rapidly as inventory levels increase. The authors argue that this offers a new rationale for poorer households not to participate in risky financial markets, while wealthier households invest in both financial assets and working capital.

Giglio, Maggiori, Stroebel, and Utkus (2020) administer a survey of investor beliefs to a large panel of wealthy individual investors and combine the survey responses with administrative data on respondents’ portfolio holdings and trading activity. The authors establish five facts about the relationship between investor beliefs and portfolios: (1) Beliefs are reflected in portfolio allocations. The sensitivity of portfolios to beliefs is small on average, but varies significantly with investor wealth, attention, trading frequency, and confidence. (2) Belief changes do not predict when investors trade, but conditional on trading, they affect both the direction and the magnitude of trades. (3) Beliefs are mostly characterized by large and persistent individual heterogeneity; demographic characteristics explain only a small part of why some individuals are optimistic and some are pessimistic. (4) Expected cash flow growth and expected returns are positively related, both within and across investors. (5) Expected returns and the subjective probability of rare disasters are negatively related, both within and across investors.

 

Improving Household Financial Decisions

Professional financial advice is pervasive in many developed countries. However, existing evidence on the effectiveness of financial advice in improving household financial decisions is mixed. In their paper, Blanes i Vidal, Hortala-Vallve, and Lou (2020) study the effects of incentives of financial advisors on the investment choices of their clients. Using exogenous variation in the compensation contracts of financial advisors triggered by MiFID II, the authors document that the investments of advised clients are strongly affected by their advisors’ compensation, and the effects are more pronounced among investors who have been with the firm for a longer time or have lower levels of financial knowledge. The authors also quantify the utility loss of investors due to the distortion. They find that the utility loss is around 4%, and the change in compensation policy triggered by MiFID II reduced this distortion by about one third.

In their paper, Liskovich and Shaton (2020) exploit a quasi-natural experiment in an online lending platform that switched from offering personalized loan prices to pricing by broad credit grades. Their objective is to identify which households take advantage of informative markets. The authors document that households with less credit experience immediately and disproportionately exit the market, and this result is concentrated among riskier borrowers. Further analysis reveals that the behavior of these households is consistent with using informative markets to learn about their cost of credit. Overall, the authors conclude that less experienced borrowers sort into markets that offer personalized information.

meeting date: 
Wednesday, September 9, 2020 to Friday, September 11, 2020