Essays on portfolio choice
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The four papers that make up my thesis take different approaches to portfolio choice. The first paper, Expertise Bias, is an empirical paper investigating individuals' portfolio choice. The main finding is that individual investors have an excess weight (according to standard portfolio theory) in stocks related to their expertise. The investigation of this research question is possible due to a unique Norwegian data set that follows all Norwegian citizens. For each individual, the data set contains information that can connect his expertise (e.g. history of employment, experience, education, and wage) with his stock holding (all individual stocks). In addition, the data set includes many socioeconomic and portfolio variables. The next two papers, Optimal Pension Insurance Design and Intergenerational Effects of Guaranteed Pension Contracts, focuson how financial institutions such as life insurance companies, manage individuals' pension savings. Optimal Pension Insurance Design documents that within a standard expected utility framework traditional pension contracts are not part of the optimal portfolio. However, the demand for the pension products may be explained through behavioral models (e.g. Cumulative Prospect Theory). The third paper documents an intergenerational cross-subsidization effect in guaranteed interest rate life and pension contracts. The subsidy may be large enough to explain why late generations hold guaranteed interest rate products as part of their optimal portfolio allocation. In the last paper I investigate portfolio choice on an even more aggregate level, a country. In Strategic Asset Allocation for a Country, I offer advice on an investment strategy that captures the long-term relationship between the non-tradable assets and liabilities and the financial assets of a country. Instead of using contemporaneous correlation, I apply cointegration and duration matching to identify the long-term relationship between the non-tradable assets and liabilities and the financial assets.