Working papers

Asset pricing with clustered, controllable disasters (July 2024). With Carina Fleischer, Holger Kraft, and Farina Weiss.

We develop a representative agent asset pricing model with tractable self-exciting consumption disasters. Compared to models with a constant disaster probability, our model increases the risk of consecutive shocks causing a large consumption drop over several years, as observed empirically. We introduce the possibility of controlling the magnitude or the probability of disasters through costly interventions.  When calibrated to OECD data, the model matches the dynamics of economic disasters, the first three unconditional moments of consumption growth, the riskfree rate, the equity premium, and the stock market's price-dividend ratio using reasonable preference parameters and moderate jump sizes.

Optimal retirement saving and dissaving (May 2024)

Applying a rich model of individuals' life-cycle utility maximization, we conduct a comprehensive evaluation of retirement saving plans for workers determining their  contributions to the plan, emulating retirement saving with 401(k)s in the U.S. Across a range of individual characteristics, the access to basic plans with constant expected payouts and either no or full annuitization leads to individual welfare gains of up to 5.06% of initial wealth and lifetime income (around $43,700 in present value terms), and almost all the individuals prefer full annuitization and a target-date fund investment strategy. With flexible plans allowing for partial annuitization, non-constant expected payouts, and unscheduled withdrawals from the pension account, the welfare gains go up to 6.20%, and most individuals prefer a high degree of annuitization and expected payouts being increasing through retirement.

Portfolio choice with ETFs (Jan 2024). With Tom Ernst and Holger Kraft.

Modern portfolio theory prescribes that investors should combine a riskfree asset with a portfolio of all risky assets. The latter is often implemented by holding an ETF tracking a stock market index. We identify three issues with this practice. First, physical ETFs only hold a subset of the stock market and may not combine the assets in the way that is optimal for investors. Second, some ETFs are synthetic and come with counterparty risk. Third, most ETFs tracking stock market indices are not counter-cyclically rebalanced to maintain constant weights which is what the optimal Merton strategy dictates. We quantify the impact of these issues on investor welfare and propose better solutions.