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Investor Confidence and Portfolio Dynamics

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  • UserRaman Uppal, EDHEC World_link
  • ClockThursday 28 January 2021, 13:00-14:00
  • HouseOnline.

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Abstract To explain the empirically observed heterogeneity in household portfolio and wealth dynamics, we develop a general-equilibrium framework with multiple risky assets along with households that differ in their confidence about the return pro- cess for the risky assets. Consistent with recent empirical evidence, less-confident households overinvest in safe assets, hold underdiversified portfolios concentrated in familiar assets, are trend chasers, and earn lower absolute and risk-adjusted investment returns. More confident investors hold riskier positions and exhibit superior market-timing abilities. The model also explains why this investment behavior, despite Bayesian learning and optimal decision, persists for long periods, thereby exacerbating wealth inequality.

This talk is part of the Cambridge Finance Workshop Series series.

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