Working Papers
Heterogeneous Risk Exposure and the Dynamics of Wealth Inequality
PDFIn this paper I argue that the dynamics of wealth inequality are largely driven by heterogeneous exposure to aggregate risk in asset returns. I propose a quantitative model of households' optimal portfolio choice that builds on evidence that housing is a necessary good. The model replicates households' portfolio heterogeneity along the wealth distribution: just like in the data, as households get wealthier they shift their portfolios away from safe assets, first towards housing, and then towards equity. Because households in different parts of the wealth distribution are exposed to different sources of aggregate risk, the model has strong implications for the evolution of inequality. In particular, temporary shocks in equity returns have large and persistent effects on top wealth shares. A key implication is that the observed rise in U.S. wealth inequality was mostly due to abnormal equity returns and it is therefore expected to revert back to lower levels.
Asset Pricing with Heterogeneous Agents under Limited Information
PDF(joint with S. Hurtado and G. Nuño)
In this paper, we study the interaction between wealth inequality and asset prices by developing a framework that features heterogeneous agents, endogenous portfolio choice, and aggregate risk. We solve the model globally under the assumption of limited information: agents forecast prices directly using observable aggregate variables, which makes the problem tractable without sacrificing on the economic mechanism. We approximate the drift and volatility of the perceived price process with neural networks and find that, while the drift component of the evolution of prices is close to linear, the volatility is highly nonlinear. This asymmetry endogenously generates time variation in risk premia that local approximation methods cannot produce and that is key to explaining the interaction between inequality and asset returns: through heterogeneous portfolio exposure, aggregate shocks reshape the wealth distribution which in turn feeds back into asset demand and prices through market clearing.