Working Papers
Heterogeneous Risk Exposure and the Dynamics of Wealth Inequality (Updated!)
PDFIn this paper I propose a quantitative theory for the dynamics of wealth inequality based on heterogeneous exposure to aggregate risk in asset returns. I develop an optimal portfolio choice model in which housing is a necessary good and households endogenously shift their portfolios towards riskier assets as they get wealthier. Since households are exposed to different sources of aggregate return risk, wealth inequality naturally responds to movements in asset returns. I show that return shocks have large and persistent effects on wealth inequality and that the model replicates the U-shape observed in top U.S. wealth shares since the 1960s.
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 featuring 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 computationally tractable without sacrificing 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 prices and asset demand through market clearing.