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Household financial decisions are complex, interdependent, and heterogeneous, and central to the functioning of the financial system. We present an overview of the rapidly expanding literature on household finance (with some important exceptions) and suggest directions for future research. We begin with the theory and empirics of asset market participation and asset allocation over the life cycle. We then discuss household choices in insurance markets, trading behavior, decisions on retirement saving, and financial choices by retirees. We survey research on liabilities, including mortgage choice, refinancing, and default, and household behavior in unsecured credit markets, including credit cards and payday lending. We then connect the household to its social environment, including peer effects, cultural and hereditary factors, intra-household financial decision-making, financial literacy, cognition, and educational interventions. We also discuss literature on the provision and consumption of financial advice.

Innovations in statistical technology in functions including credit-screening have raised concerns about distributional impacts across categories such as race. Theoretically, distributional effects of better statistical technology can come from greater flexibility to uncover structural relationships or from triangulation of otherwise excluded characteristics. Using data on U.S. mortgages, we predict default using traditional and machine learning models. We find that Black and Hispanic borrowers are disproportionately less likely to gain from the introduction of machine learning. In a simple equilibrium credit market model, machine learning increases disparity in rates between and within groups, with these changes attributable primarily to greater flexibility.

We identify a new channel for the transmission of shocks across international markets. Investor flows to funds domiciled in developed markets force significant changes in these funds' emerging market portfolio allocations. These forced trades or \"fire sales\" affect emerging market equity prices, correlations, and betas, and are related to but distinct from effects arising purely from fund holdings or from overlapping ownership of emerging markets in fund portfolios. A simple model and calibration exercise highlight the importance to these findings of \"push\" effects from funds' domicile countries and \"co-ownership spillover\" between markets with overlapping fund ownership.

This article reviews the literature on international comparative household finance. It presents summary statistics on household balance sheets for 13 developed countries and uses these statistics to discuss common features and contrasts across countries. It then discusses retirement savings, investments in risky assets, unsecured debt, and mortgages.

Using a new technique, and weekly data for 25 countries from 1994 to 1998, we analyze the relationship between institutional cross-border portfolio flows, and domestic and foreign equity returns. In emerging markets, institutional flows forecast statistically indistinguishable movements in country closed-end fund NAV returns and price returns. In contrast, closed-end fund flows forecast price returns, but not NAV returns. Furthermore, institutional flows display trend-following (trend-reversing) behavior in response to symmetric (asymmetric) movements in NAV and price returns. The results suggest that institutional cross-border flows are linked to fundamentals, while closed-end fund flows are a source of price pressure in the short run.

We decompose currency returns into (permanent) intrinsic-value shocks and (transitory) expected-return shocks. We explore interactions between these shocks, currency returns, and institutional-investor currency flows. Intrinsic-value shocks are: dwarfed by expected-return shocks (yet currency returns overreact to them); unrelated to flows (although expected-return shocks correlate with flows); and related positively to forecasted cumulated-interest differentials. These results suggest flows are related to short-term currency returns, while fundamentals better explain long-term returns and values. They also rationalize the long-observed poor performance of exchange-rate models: by ignoring the distinction between permanent and transitory exchange-rate changes, prior tests obscure the connection between currencies and fundamentals.

Rational theories of the closed-end fund premium puzzle highlight fund share and asset illiquidity, managerial ability, and fees as important determinants of the premium. Several of these attributes are difficult to measure for mutual funds, and easier to measure for hedge funds. This paper employs new data from a secondary market for hedge funds, discovers a closed-hedge fund premium that is highly correlated with the closed-end mutual fund premium, and shows that the closed-hedge fund premium is well explained by variables suggested by rational theories. Sentiment-based explanations do not find support in the data.

We study a unique field experiment in India in which 1.5 million stock investors face lotteries for the random allocation of shares. We find that the winners of these randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold them than lottery losers 1, 6, and even 24 months after the random allocation. This finding strongly evokes laboratory findings of an “endowment effect” for risky gambles, and persists in samples of highly active investors, suggesting along with additional evidence that this behaviour is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. Leading theories of the endowment effect based on reference-dependent preferences are unable to fully explain these and other findings in the data.

We build an empirical model to attribute delays in mortgage refinancing to psychological costs inhibiting refinancing until incentives are sufficiently strong; and behavior, potentially attributable to information-gathering costs, lowering the probability of household refinancing per unit time at any incentive. We estimate the model on administrative panel data from Denmark, where mortgage refinancing without cash-out is unconstrained. Middle-aged and wealthy households act as if they have high psychological refinancing costs; but older, poorer, and less-educated households refinance with lower probability irrespective of incentives, thereby achieving lower savings. We use the model to understand frictions in the mortgage channel of monetary policy transmission.

We evaluate the impacts of tax policy on asset returns using the U.S. municipal bond market. In theory, tax-induced ownership segmentation limits risk sharing, creating downwardsloping regions of the aggregate demand curve for the asset. In the data, cross-state variation in tax privilege policies predicts differences in in-state ownership of local municipal bonds; the policies create incentives for concentrated local ownership. High tax privilege states have muni bond yields that are more sensitive to variations in supply and local idiosyncratic risk. The effects are stronger when local investors face correlated background risk and/or diminishing marginal nonpecuniary benefits from holding local assets.