Plamen T. Nenov
Norwegian Business School (BI)
Nydalsveien 37 0484 Oslo, Norway
NBER Working Papers and Publications
|October 2015||The Choice Channel of Financial Innovation|
with Felipe S. Iachan, Alp Simsek: w21686
Financial innovations in recent decades have vastly expanded investors' portfolio choice. We theoretically analyze the effect of these developments on investors' savings and asset returns. In our model, investors with possibly heterogeneous beliefs choose their savings portfolios. Under mild assumptions, we establish a choice channel by which greater portfolio choice increases investors' (perceived) return from saving, and induces them to save more. We then investigate the asset pricing implications of the choice channel, which depend on the type of financial innovation. Our main result shows that greater customization, which we capture with improved ability to trade risky assets other than the market portfolio, reduces the expected return on every asset. This result is consistent with the...