The Journal of Finance

Diversification and Its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status

Published: 09/21/2010   |   DOI: 10.1111/j.1540-6261.2010.01593.x

NIKOLAI ROUSSANOV

Social status concerns influence investors' decisions by driving a wedge in attitudes toward aggregate and idiosyncratic risks. I model such concerns by emphasizing the desire to “get ahead of the Joneses,” which implies that aversion to idiosyncratic risk is lower than aversion to aggregate risk. The model predicts that investors hold concentrated portfolios in equilibrium, which helps rationalize the small premium for undiversified entrepreneurial risk. In the model, status concerns are more important for wealthier households. Consequently, these households own a disproportionate share of risky assets, particularly private equity, and experience greater volatility of consumption, consistent with empirical evidence.

Commodity Trade and the Carry Trade: A Tale of Two Countries

Published: 08/21/2017   |   DOI: 10.1111/jofi.12546

ROBERT READY, NIKOLAI ROUSSANOV, COLIN WARD

Persistent interest rate differentials account for much of the currency carry trade profitability. “Commodity currencies” offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods. In the model, domestic production insulates commodity‐producing countries from global productivity shocks, forcing final‐good producers to absorb them. Commodity‐currency exchange rates and risk premia increase with productivity differentials and trade frictions. These predictions are strongly supported in the data.

Houses as ATMs: Mortgage Refinancing and Macroeconomic Uncertainty

Published: 10/08/2019   |   DOI: 10.1111/jofi.12842

HUI CHEN, MICHAEL MICHAUX, NIKOLAI ROUSSANOV

Mortgage refinancing activity associated with extraction of home equity contains a strongly countercyclical component consistent with household demand for liquidity. We estimate a structural model of liquidity management featuring countercyclical idiosyncratic labor income uncertainty, long‐ and short‐term mortgages, and realistic borrowing constraints. We empirically evaluate its predictions for households' choices of leverage, liquid assets, and mortgage refinancing using microlevel data. Taking the observed historical paths of house prices, aggregate income, and interest rates as given, the model accounts for many salient features in the evolution of balance sheets and consumption in the cross‐section of households over 2001 to 2012.