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Working Paper, No. 2022-05, January 2022 Crossref
Cyclical Transactions and Wealth Inequality

Wealth is distributed more unevenly than income, and one contributing factor might be that richer households earn higher portfolio returns. I uncover one channel that causes portfolio returns to be increasing in wealth: Poorer households consistently buy risky assets in booms—when expected returns are low—and sell after a bust—when expected returns are high. Although time-varying expected returns are a robust empirical fact, theories are ambiguous on whether poorer or richer households engage in such cyclical trading patterns. I estimate the trading patterns for households across wealth levels, in the US housing market for 1988-2013. I interact housing ownership patterns from deeds records with household-level wealth, which I infer from merging owners’ surnames with their name-based income in the 1940 full Census. The estimated dispersion in expected returns from this “buy-high-sell-low” channel is large: The interquartile-range difference is 60 basis points per year. The channel predicts that geographies with historically higher volatility will feature more wealth inequality than income inequality: I verify this implication in the data. These results suggest that a government policy intended to boost poorer households’ wealth via homeownership can backfire if it ignores the status of house prices.


Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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