Economic Integration and Mature Portfolios

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Economic Integration and Mature Portfolios

• Dimitris Christelis CSEF,
  University of Salerno
• Dimitris Georgarakos
• Goethe University Frankfurt and CFS
• Michael Haliassos
• Goethe University Frankfurt, CFS, MEA

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Main Approaches in Integration Literature

• Integration has been assessed by looking at
• Considerable international flows across markets.
• Prices
• In a fully integrated market for goods, the law
  of one price should hold.
• In a fully integrated asset market, the price of
  risk should be the same.
• Consumption behavior international risk sharing.
  
• In a fully integrated world, households would
  insure against output risks idiosyncratic to
  their countries by holding securities in other
  countries subject to different shocks.

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Motivation

• An economic agent of given preferences and
  characteristics optimizes subject to
• a set of processes (e.g. for labor income and
  asset returns)
• policies (e.g. for taxation or retirement
  financing)
• and constraints (e.g. credit market
  imperfections, informational limitations)
• Resulting policy rules (e.g. for asset demands)
  interact with the supply side and produce
• observed asset participation patterns
• asset holdings among participants.

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Motivation (ctd)

• With greater integration, greater similarity in
  market conditions facing households of given
  characteristics
• greater similarity in supply-side conditions
• harmonization of policies and institutions
• cultivation of common culture/preferences
• greater access to foreign markets

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Motivation (ctd)

• Thus, controlling for differences in population
  characteristics, greater integration should be
  reflected in greater similarity of the
  relationship between household characteristics
  and asset behavior as regards
• Participation in asset markets
• Asset holdings among market participants
• Newly available data can be used to assess extent
  of similarity in this relationship
• Across countries
• Across regions
• Across assets

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Mature Portfolios

• In principle, all portfolios interesting
• Mature Portfolios portfolios of those 50
• More time to accumulate
• Greater experience
• Influenced by retirement prospects
• Also topical to study
• Financing retirement in view of demographic
  transition
• Prospects of asset meltdown

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This paper Data

• Three comparable data sets, sharing common design
  (about 37000 HH)
• HRS US 2004
• ELSA EN 2004
• SHARE
• First wave took place in 2004 in Sweden, Denmark,
  Germany, the Netherlands, France, Switzerland,
  Austria, Italy, Spain, and Greece and in 2005 in
  Belgium.

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This paper Issues

• We decompose differences in
• Participation rates in assets
• configuration of characteristics of populations
• influence of characteristics on participation
  probability
• Asset holdings among market participants
• configuration of characteristics of asset holder
  pools
• influence of characteristics on asset levels
• Comparisons
• US versus each European country examined
• Within US (Midwest as benchmark)
• Within Europe (Germany as benchmark)

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Assets Considered

• Financial Stocks
• held directly or indirectly
• Real assets
• Private businesses
• Primary residence

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Participation RatesObserved Differences among
Older HHs
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Counterfactual decomposition

• Decomposition is of the following form

Covariate Effects
Actual difference
Coefficient Effects
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Decomposing Covariate from Coefficient Effects on
Participation

• Construct counterfactual average predicted
  probability of participation for the population
  in country i if they faced coefficients of the
  base country.
• First run probit in base country
• Regressors 2nd order age polynomial, household
  size, education (high school dropout high school
  degree College degree), recall ability,
  self-reported bad health (includes responses
  fair and poor in HRS), number of ADL, work
  status (retired/working/unemployed-other
  inactive), marital status (couple/widow/never
  married), subjective probability to leave a
  positive bequest, whether has received an
  inheritance, whether HH provides help to
  relatives/neighbors, whether is involved in
  voluntary activities, income quartile, wealth
  quartile.
• Apply this set of coefficients to the sample of
  country i and compute average predicted
  probability.
• Draw (with replacement) the full sample size from
  both countries and repeat 100 times to compute
  bootstrap standard errors.

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Results on Europe-US comparisons

• Stockholding
• Neither the market conditions faced by households
  in most European countries nor their
  characteristics are as conducive to participation
  in stockholding (direct or indirect) as those of
  the US.
• Private business
• Market conditions are largely responsible for
  lower participation in private business in Europe
  than in the US.
• Most European older populations are estimated to
  have characteristics as conducive to business
  ownership as those of the US population.
• Homeownership
• Coefficient effects are positive in most cases
  suggesting favorable US market conditions
• Exceptions southern countries, EN (and small for
  BE) where households would have lower
  probabilities if faced with US market conditions.
• All covariate effects are positive, in favor of
  the US.

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Stockholding Participation
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Participation in Private Business
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Participation in Homeownership
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Comparison of Roles of Specific Factors

• We compute marginal effects of a unit change in
  a given factor and compare them across assets and
  countries.
• We estimate marginal effects for each household
  in the country and then average across households
• Both estimates and simulated standard errors are
  reported

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Marginal Effects of Higher Education Degree
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Marginal Effects of Self-declared Bad Health
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Participation Within the US

• Market conditions in the Midwest are more
  conducive to participation in any of these asset
  classes.
• Exception the South is estimated to have even
  more favorable conditions for homeownership than
  the Midwest.
• Though statistically significant, estimated
  differences are rather small.

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Participation Within Europe

• Differences in participation rates arise mainly
  from differences in market conditions rather than
  in population characteristics.
• With very few exceptions, coefficient effects are
  statistically significant and often quite large
• small for business ownership

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Results on Within- Integration
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Counterfactual decompositionLevels of Asset
Holdings

• Decomposition is of the following form

Covariate Effects
Coefficient Effects
Actual difference
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Implementation

• Adapt a technique proposed by Machado and Mata
  (2005), following Albrecht et al. (2003)
• First run 19 quantile regressions at every 5th
  percentile for each asset, on base country wners
• Regressors 2nd order age polynomial, household
  size, education (high school dropout high school
  degree College degree), recall ability,
  self-reported bad health (includes responses
  fair and poor in HRS), number of ADL, work
  status (retired/working/unemployed-other
  inactive), marital status (couple/widow/never
  married), subjective probability to leave a
  positive bequest, whether has received an
  inheritance, whether HH provides help to
  relatives/neighbors, whether is involved in
  voluntary activities, income quartile, wealth
  quartile.
• For each percentile, draw (with replacement) full
  sample size from comparison country and estimate
  holdings if in base country
• Thresholds for income and wealth quartiles are
  defined for the base-country over all older
  households.
• Comparison country households are then placed in
  quartiles according to those thresholds.
• Rank estimated holdings compare with actual
  holdings

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Stockholding Levels

• Strong coefficient effects
• European stockholders would achieve considerably
  higher levels of stock holdings if they were
  confronted with US market conditions.
• Covariate effects are small and mostly
  insignificant across percentiles.

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CounterfactualsStockholding Levels, Direct and
Indirect(similar pictures for FR, EN)
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CounterfactualsStockholding Levels, Direct and
Indirect(similar pictures for ES, GR)
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CounterfactualsStockholding Levels, Direct and
Indirect
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Private Business Holdings

• Most of the differences can be accounted for by
  differences in market conditions.
• If European private business holders were faced
  with US markets conditions, they would be holding
  lower amounts in private businesses.
• England represents the only case where business
  holders (in particular small ones) would hold
  higher amounts.
• Covariate effects are insignificant.

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CounterfactualsPrivate Business Wealth (similar
pictures for SE, DE)
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CounterfactualsPrivate Business Wealth (similar
pictures for ES, GR)
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CounterfactualsPrivate Business Wealth
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Primary Residence

• European homeowners in virtually all countries
  would have smaller holdings if they faced US
  market conditions.
• Coefficient effects are particularly strong and
  well exceed the overall differences in home
  values observed in England and in southern
  countries.
• By contrast, US homeowners have characteristics
  more conducive to large home equity values than
  European homeowners.

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CounterfactualsHousing Wealth (similar pictures
for BE, AT)
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CounterfactualsHousing Wealth (similar pictures
for ES, GR, EN)
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Amounts Within US

• Coefficient effects suggest that households in
  different regions face
• Similar market conditions with respect to
  stockholding
• Greater incidence of statistically significant
  coefficient effects for private businesses
• Even greater for the primary residence

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Amounts Within Europe

• Stockholding
• Vast majority of countries exhibit strongly
  significant coefficient effects relative to
  Germany
• Private Business
• Households with small or medium holdings tend to
  face comparable market conditions across European
  countries
• Statistically and economically significant
  differences are observed for those with the
  largest holdings
• Homes
• Coefficient effects are statistically
  significant, but their estimated size and sign
  exhibit considerable variation across European
  countries when compared to Germany
• A number of statistically significant covariate
  effects, implying that differences in home values
  arise partly from differences in characteristics
  of homeowners across European countries

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Results on Within- Integration
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Concluding remarks

• Evidence of quite limited integration between US
  and major European countries, but also within
  Europe
• Considerable variation in observed
• Asset participation
• Levels of asset holdings among holders
• Coefficient effects typically more important
  factor for international differences in asset
  holdings, compared to differences in household
  characteristics