Publications
Publications
- 2023
Interest-Rate Risk and Household Portfolios
By: Sylvain Catherine, Max Miller, James Paron and Natasha Sarin
Abstract
How are households exposed to interest-rate risk? When rates fall, households face lower future expected returns but those holding long-term assets—disproportionately the wealthy and middle-aged—experience capital gains. We study the hedging demand for long-term assets in a portfolio choice model. The optimal interest-rate sensitivity of wealth is hump-shaped over the life cycle. Within cohorts, it increases with wealth and earnings. These predictions fit observed patterns in the United States, suggesting a relatively efficient distribution of interest-rate risk. By protecting workers from rate fluctuations, Social Security limits the welfare consequences of rising wealth inequality when rates fall.
Keywords
Portfolio Choice; Social Security; Interest Rates; Investment Portfolio; Equality and Inequality; Welfare
Citation
Catherine, Sylvain, Max Miller, James Paron, and Natasha Sarin. "Interest-Rate Risk and Household Portfolios." Working Paper, October 2023. (Reject and Resubmit, American Economic Review.)