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Aggregate portfolio choice

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  • Inkmann, Joachim

Abstract

Important portfolio choice decisions are made for large groups of heterogeneous individual investors. I propose solving the cross-sectional average of the individual Euler equations to find an optimal portfolio for an aggregate of investors under one-size-fits-all constraints. Using a dynamic portfolio choice model to design balanced default funds for 72 hypothetical industry pension plans, the average Euler equations depend on industry-specific per-capita earnings growth and moments of idiosyncratic earnings shocks. Inter-industry heterogeneity in moments of the joint distribution of earnings growth and the return on risky assets, including correlation and cokurtosis, explains the variation in optimal choice variables across industries.

Suggested Citation

  • Inkmann, Joachim, 2024. "Aggregate portfolio choice," Journal of Empirical Finance, Elsevier, vol. 77(C).
    • Handle: RePEc:eee:empfin:v:77:y:2024:i:c:s092753982400029x
    DOI: 10.1016/j.jempfin.2024.101494
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    More about this item

    Keywords

    Dynamic portfolio choice; Designing default funds; Earnings risk; Aggregation; GMM;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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