Asset Demand of U.S. Households

Abstract

We use new monthly security-level data on portfolio holdings, flows, and returns of U.S. households to understand asset demand across multiple asset classes. Our data cover a wide range of households across the wealth distribution – including ultra-high-net-worth (UHNW) households – and holdings in many asset classes, including public and private assets. We first develop a descriptive model to summarize households’ rebalancing behavior. We find that less wealthy households rebalance from liquid risky assets to cash during market downturns, while UHNW households tend to purchase risky assets during those periods and thus stabilize market fluctuations. This pattern is particularly pronounced for U.S. equities. Across risky asset classes, three factors explain most of the variation in portfolio rebalancing and those factors target the long- term equity premium, the credit premium, and the premium on municipal bonds. Next, we develop a new framework to estimate demand curves across asset classes. While nesting traditional models as a special case, our framework allows for a muted response of asset demand to fluctuations in asset prices and easily extends to account for inertia. Our new estimator of asset demand curves exploits variation in second moments of returns and portfolio rebalancing, and can even be used when only a fraction of all holdings in a market can be observed. Our preliminary results indicate that asset demand elasticities are smaller than those implied by standard theories, vary significantly across the wealth distribution, and are negative for various groups, pointing to positive feedback trading. In sum, we think that our framework and data paint a coherent picture of U.S. households that captures, quite uniquely, their rebalancing behavior across the wealth distribution and across broad asset classes.