Stockholding: Recent Lessons from Theory and Computations

Abstract

This chapter presents recent developments in the theory of optimal portfolio design in a non-technical manner, provides the intuition behind these results, and uses them to interpret important findings in the empirical literature based on high-quality, household-level portfolio data. Where theoretical predictions are confirmed by empirical observation, theory provides a way to interpret empirical findings. Where the two disagree, the mechanisms stressed by theory serve as a first step towards identifying the full set of factors at work and the extent to which household behaviour can be modified to fit objectives better.

I am grateful to Luigi Guiso for insightful comments on a previous draft, and to Carol Bertaut, Christis Hassapis, Tullio Jappelli, and Alexander Michaelides for discussions, over the recent years, that contributed to shaping the ideas presented here. I would like to give special thanks to the Observatoire de l’Epargne Européenne, Paris, France for financial support of this research project. I have benefited from interactions with OEE project participants in preparing this chapter. I also thank the HERMES Center on Computational Finance and Economics and the Leventis Foundation for supporting some of the original research reported in this paper.