Macro Implications of Household Finance

Joint with: YiLi Chien and Hanno Lustig

Our paper examines the impact of heterogeneous trading opportunities on the distribution of asset shares and wealth in an equilibrium model. We distinguish between “passive” traders who hold fixed portfolios of equity and bonds, and “active” traders who adjust their portfolios to changes in the investment opportunity set. In the presence of non-participants, the fraction of active traders is critical for asset prices, because only these traders respond to variation in state prices and hence help to clear the market, not the fraction of agents that participate in

asset markets. We develop a new method for computing equilibria in this class of economies. This method relies on an optimal consumption sharing rule and an aggregation result for state prices that allows us to solve for equilibrium prices and allocations without having to search

for market-clearing prices in each asset market. In a calibrated version of our model, we show that the heterogeneity in trading opportunities allows for a closer match of the wealth and asset share distribution as well as the moments of asset prices.

For more information, contact Iourii Manovskii.