Who Owns What? A Factor Model for Direct Stockholding

We build a cross-sectional factor model for investors’ direct stockholdings, by analogy with standard time-series factor models for stock returns. We estimate the model using data from almost 10 million retail accounts in the Indian stock market. We find that stock characteristics such as firm age and share price have strong investor clienteles associated with them. Similarly, account attributes such as account age, account size, and extreme underdiversification (holding a single stock) are associated with particular characteristic preferences. Coheld stocks tend to have higher return covariance, suggestive of the importance of clientele effects in the stock market.


Synchronized Elections, Voter Behavior and Governance Outcomes: Evidence from India

We examine whether holding national and state elections simultaneously or sequentially affects voter decisions and consequently, electoral and economic outcomes in India. Synchronized elections increase the likelihood of the same political party winning constituencies in both tiers by 21%. It reduces split-ticket voting, increases the salience of party among voters and shifts voters’ priority to state issues, without significantly affecting turnout and winning margin. A model of behaviorally constrained voters with costly information acquisition best explains our results. Finally, synchronization results in insignificant economic gains. Our findings have implications for the design of elections to multiple tiers of government.

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Unshrouding product-specific attributes through financial education

We estimate the impact of a product-specific education video on the intention to purchase a shrouded, sub-optimal insurance product in India. Our intervention results in a significant decline in potential demand, preventing potential welfare losses to newly-informed consumers; however, these benefits may come at the cost of other myopic consumers if equilibrium outcomes remain unaltered by our intervention. Using a model of shrouded attributes with financial education, we characterize the size of treatment effects required to result in an unshrouded market equilibrium. Our approach increases the region of unshrouded equilibrium, albeit marginally. Positive effects of financial education may be necessary, but not a sufficient condition to improve overall welfare.

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The Household Finance Landscape in Emerging Economies

We survey the household finance landscape in emerging economies. We first present statistics on household balance sheets from official micro-surveys in countries comprising 45% of the global population: China, India, Bangladesh, Philippines, Thailand, and South Africa. We contrast these patterns with those in data from advanced economies. We then survey the nascent literature on household finance in emerging economies and discuss areas of overlap with the more well-established literature on household finance in advanced economies, as well as the large body of literature on development finance. We highlight useful directions for future research.

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Learning from Noise: Evidence from India’s IPO Lotteries

Abstract:  We study a natural experiment in which 1.5 million investors participate in allocation lotteries for Indian IPO stocks between 2007 and 2012. Random gains on these stocks cause winning investors to increase applications to future IPOs, tilt portfolios towards the IPO’s industry sector, and substantially increase portfolio trading volume in non-IPO stocks relative to lottery losers. Effects are symmetrically negative for experienced losses, and decline monotonically with the number of past IPO allocations received. We consider a number of different models; the evidence is most consistent with investors learning about their own ability from experienced noise, drawing inferences about their skill from luck. These results suggest that economic agents learn about their own ability from noise shocks, though repeated exposure to these shocks and/or selection can significantly attenuate these responses.


RBI Committee on Household Finance

The Reserve Bank of India set up a committee to look at the various facets of household finance in India and benchmark India’s position against both the peer countries and advanced countries. The terms of reference of the panel include suggestions to benchmark the current depth of household financial markets in India vis-a-vis those in other major world markets and identify areas of priority for growth and change. It will also characterise and evaluate Indian households’ demands in formal financial markets (for assets such as pensions as well as liabilities such as home loans) over the coming decade. The panel will also consider whether, how, and why the financial allocations of Indian households deviate from desirable financial allocation and behaviour (e.g., the large household allocation to gold). It will evaluate the design of new systems and the redesign of existing systems of incentives and regulations to encourage and enable better participation by Indian households in formal financial markets. The panel will assess the role of new financial technologies and products — like robo-advising, automatically refinancing mortgages — in the cost-effective provision of high-quality and suitable financial products to Indian households while containing risks.

The report can be found on the RBI website here.