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1 Wi the Shift to Stocks and Bonds By Househods Be Destabiizing? By Donad P. Morgan In the ast decade, househods have tended to shift out of bank deposits and money market funds and into stocks and bonds. Some anaysts and journaists worry that the shift coud be destabiizing to the economy and financia markets. Consumption spending, it is argued, might fuctuate more because househods have invested in riskier stocks and bonds. Financia markets aso coud be more voatie because househods might behave as short-sighted novices who wi se assets in panic at the first dip in the market. In addition, the pension and mutua funds through which househods invest tend to trade more activey than househods. The increasing roe of such heavy traders, it is feared, might increase financia market voatiity. This artice contends such concerns, though understandabe, are exaggerated. The first section shows that the shift into stocks and bonds primariy indicates aging American workers are saving for retirement. The second section shows that portfoio shifts in the past did not destabiize consumption, and argues that new investors this time around wi not destabiize financia markets. Househods, for their part, are investing for ong-run Donad P. Morgan is a senior economist of the Federa Reserve Bank of Kansas City. Stephen Rave, a research associate at the bank, heped prepare the artice. goas and therefore are ikey to ride out short-term bumps in the market. Moreover, the roe of institutiona investors in the market has been trending up for 30 years without any accompanying trend in the voatiity of stock prices. THE SHIFT IN HOUSEHOLD PORTFOLIOS American househods own a arge portfoio of financia assets divided among safe assets, such as bank deposits and money market shares, and riskier assets, such as stocks and bonds. Over the ast decade, some househods have assumed riskier portfoios by substituting stocks and bonds for bank deposits and money market shares. Dimensions of the shift Even though the shift into stocks and bonds has drawn attention ony recenty, the trend began in the eary 1980s (Chart 1). 1 The share of financia assets invested in stocks and bonds increased from 60 percent in 1982 to about 75 percent in 1993, the highest share since The share of financia assets invested in deposits and money market shares decreased over that period from 40 percent to 25 percent, the owest share since 1961.

2 32 FEDERAL RESERVE BANK OF KANSAS CITY Chart 1 Househods Have Shifted into Stocks and Bonds Percent of househod financia assets Stocks and bonds Deposits and money market shares Note: Incuded are direct hodings by househods and indirect hodings in mutua funds, pensions, ife insurance, and trust funds; see endnote for detais. Source: Fow of Funds Accounts, Federa Reserve System. Over the ast decade, househods have invested mainy through intermediaries, such as pension and mutua funds, rather than buying stocks and bonds directy in the market (Chart 2). Stocks and bonds hed in pension funds have increased steadiy since the 1950s. Stocks and bonds hed in mutua funds, whie neary fat unti 1983, have grown dramaticay since that time. Direct hodings of stock and bonds, in contrast, were fat over the ast decade. The preference for investing through intermediaries over investing directy is a recent phenomenon. Househods in the 1950s and 1960s chose to invest directy in the market, even though stock and bond mutua funds were avaiabe. Househods now hod about the same share of their financia assets in stocks and bonds as then, but hod a much smaer share directy. U.S. residents, incuding househods, have aso invested more recenty in foreign stocks and bonds (Chart 3). Athough sti a sma share of tota financia assets, foreign stocks and bonds now represent 4 percent of a househod stock and bond hodings, with much of this growth occurring recenty. Internationa and goba mutua funds are among the fastest growing casses of mutua funds and account for a arge share of the spurt in mutua funds in the 1990s (Mutua Fund Fact Book).

3 ECONOMIC REVIEW SECOND QUARTER Chart 2 Househods Have Invested Through Pension and Mutua Funds Percent of househod financia assets Direct hodings of stocks and bonds Pension assets Stock and bond mutua funds Source: Fow of Funds Accounts, Federa Reserve System. Risks of the shift Househods substituting stocks and bonds for bank deposits and money market shares have increased the riskiness of their portfoios. Stocks and bonds are inherenty riskier than either bank deposits or money market shares. Bank deposits up to $100,000 are perfecty safe because they are federay insured. Larger bank deposits and money market shares, though not insured, are sti safer than stocks or bonds. The recent preference for diversified portfoios of pension and mutua funds mitigates, but does not offset, the increase in risk. 2 By pooing the resources of many investors, these funds enabe individuas to invest in many different securities. Investing in many securities is usuay safer than investing the same amount in ony one of those securities because a fa in one security s price may be mitigated by a rise in the price of another. Sti, even a perfecty diversified portfoio of stocks and bonds is riskier than a portfoio of bank deposits and money market shares, which is essentiay risk free. The trend over the ast decade to defined contribution pension pans aso increases the portfoio risk for some househods. The share of a pension assets invested in defined contribu-

4 34 FEDERAL RESERVE BANK OF KANSAS CITY Chart 3 U.S. Residents Have Invested in Foreign Stocks and Bonds Percent of a stocks and bonds 4 3 Foreign stocks and bonds Note: U.S. residents incude househods and corporations. Source: Fow of Funds Accounts, Federa Reserve System. tion pans increased from 30 percent in 1982 to about 43 percent in 1990 (Private Pension Pan Buetin). Under such pans, payments to retirees are determined by the vaue of assets in the pension. The risk of decining asset prices is thereby borne by the pension hoders themseves. Under the aternative of defined benefit pans, in contrast, payments to retirees are independent of the vaue of pension assets. The company sponsoring the pan, therefore, bears the risk of decining asset prices. This risk is shared by the federa government because defined benefit pans are insured by the Pension Benefit Guaranty Corporation. Given these differences between the two types of pans, the househods investing through defined contribution pans are bearing more risk. Investing abroad might aso increase portfoio risk because the prices of foreign stocks and bonds fuctuate more than in the United States. For exampe, the standard deviations of monthy stock and bond returns in the United States in the 1980s were ony 4.8 percent and 3 percent, compared with 6.6 percent and 4.6 percent on average in Japan, Germany, Britain, and Canada (Tesar and Warner). 3 In addition, foreign investments entai exchange rate risk because foreign assets are usuay purchased with that country s currency. After seing the asset, U.S. investors must convert the foreign currency to doars. Depreciation of the foreign currency against the doar, therefore, coud reduce the return on the investment.

5 ECONOMIC REVIEW SECOND QUARTER Reasons for the shift Whether the shift into stocks and bonds wi be destabiizing depends in part on why househods shifted in the first pace. If househods are investing for short-term gains, the shift may pose risks to the economy and financia markets. Such risks appear more remote, however, if househods are investing for the ong term. In fact, househods appear to have shifted into stocks and bonds primariy because they are saving for retirement as they age. Other possibe reasons for the shift the avaiabiity of mutua funds, the steep yied curve, and changes abroad appear to have been incidenta. Mutua funds. Some suggest that the avaiabiity of diversified mutua funds has ed househods to invest more in stocks and bonds. However, stock and bond funds have been avaiabe since the 1920s, so their avaiabiity cannot expain the portfoio shift over the ast decade (Mutua Fund Fact Book). Househods demand for stocks and bonds increased in the eary 1980s for some other reason, which in turn increased their demand for mutua funds. 4 To reverse the story paces the cart before the horse. Steep yied curve. Another possibe reason for the shift into stocks and bonds is the unusuay arge spread between ong-term bond yieds and short-term interest rates in the 1990s (Chart 4). The spread was negative on average in 1989 and then steepened dramaticay unti it peaked at a record of 3.5 percentage points in During that period, short-term interest rates fe reative to ong-term rates as the Federa Reserve eased its monetary poicy. 6 Reative yieds infuence investors, of course, so the steep yied curve is an obvious possibe expanation for the shift into onger term stocks and bonds. The steep yied is ony a partia expanation, however, for two reasons. First, athough stock and bond hodings began increasing about the same time the yied curve began steepening in the eary 1980s, stock and bond hodings continued increasing even when the yied curve fattened over Second, this expanation takes the high yied on ong-term assets as given. Doing so is fine when expaining why an individua is demanding ong-term assets because reative yieds are not affected by an individua s demand. Taking yieds as given is unsatisfactory in expaining aggregate portfoio shifts, however, because such shifts do affect yieds. 7 A more fundamenta reason is needed to expain why househods have been demanding stocks and bonds. Changes abroad. Dereguation, rapid economic growth, and poitica and economic reform abroad have increased U.S. investors demand for foreign assets. Deveoped countries around the word dereguated financia markets in the 1980s by ifting ceiings on interest rates and reaxing contros on foreign ownership and exchange rates (Maxwe and others). Rapid economic growth in the newy deveoped countries aong the Pacific Rim aso attracted U.S. investors. And, poitica and economic reforms in Latin America in the ate 1980s and eary 1990s, together with the resoution of the debt crisis, have encouraged U.S. foreign investment. A these fundamenta changes increased U.S. househods demand for foreign stocks and bonds. Nevertheess, such assets sti comprise too sma a share of a stocks and bonds to expain the overa portfoio shift into stocks and bonds. Aging popuation. Demographic shifts are another expanation for portfoio shifts. As young workers in their 20s and eary 30s enter the abor force, they are at the stage in their ife when they are starting famiies and are borrowing to buy and furnish houses. To the extent such young househods save at a, they are incined to hod very safe, short-term assets, such as bank deposits, which are readiy convertibe to cash and then into goods. But as workers age and begin to contempate retiring, they save more and their investment horizon stretches. With onger horizons, they are wiing to accept greater short-run voatiity in exchange for ong-term returns, and so shift toward stocks and bonds.

6 36 FEDERAL RESERVE BANK OF KANSAS CITY Chart 4 The Yied Curve Steepened in the 1990s Percentage points Spread between ten-year bond yied and federa funds rate Source: Board of Governors, Federa Reserve System. In fact, the share of househod assets in stocks and bonds foows very cosey the share of workers aged 35 or oder (Chart 5). Both shares peaked in the eary 1960s and began decining as the first wave of baby boomers entered the abor force. The shift out of stocks and bonds acceerated in the eary 1970s as high energy prices and infation squeezed business profits and dividends. The portfoio shift woud have continued regardess, however, as baby boomers continued to throng the abor force in the 1970s. By the eary 1980s, most baby boomers had turned 30 something and so began migrating from iquid deposits into higher risk, but higher yieding, stocks and bonds. Demographic shifts, by themseves, expain most of the portfoio shifts both over the ast 40 years and since More precisey, 91 percent of the yeary changes in the share of househod financia assets in stocks and bonds can be expained by statisticay regressing that share against the share of workers 35 or oder. Potting each share in each year against the regression ine estimated over reveas that hodings of stocks and bonds have risen as expected from 1983 to 1993, given the aging work force (Chart 6). This cose fit indicates that demographic shifts were the primary reason for the portfoio shift. Other possibe reasons the avaiabiity of mutua funds, the steep yied curve, and changes abroad appear to have been incidenta at most. 8 Despite the ong-run investment goas of househods, some anaysts and journaists have

7 ECONOMIC REVIEW SECOND QUARTER Chart 5 Portfoio Shifts Track Demographic Shifts Percent of househod financia assets 80 Popuation 35 or oder (right scae) 75 Percent of work force Stocks and bonds (eft scae) Source: Fow of Funds Accounts, Federa Reserve System; U.S. Census Bureau. conjured aarming scenarios about the destabiizing impact of the portfoio shift. With so much weath invested in stocks and bonds, they worry, a dip in the market coud stagger consumption and the aggregate economy (Kaufman; Hae; Beakey). The new investors coud aso destabiize financia markets by seing assets in panic when the market dips, turning the dip into a crash (Koretz; Kuhn; Wayne). IMPLICATIONS FOR STABILITY Concerns about increased voatiity of consumption and financia markets seem exaggerated. Portfoio shifts in the past did not destabiize consumption and new investors are not ikey to destabiize financia markets. Moreover, househods foreign investments, by diversifying risks abroad, coud hep stabiize consumption. Portfoio shifts and consumption The portfoio shift over the ast decade is not the first such shift, ony the most recent. Househods aso began a shift into stocks and bonds in 1953, and by 1955 had invested more of their financia weath in stocks and bonds than they have today. For the next 15 years househods invested about as much of their financia weath in stocks and bonds as they have currenty. In the eary 1970s,

8 38 FEDERAL RESERVE BANK OF KANSAS CITY Chart 6 Stock and Bond Hodings Have Risen as Expected, Given the Aging Work Force Percent of househod financia assets Stock and bond hodings regression ine Share of work force 35 or oder Note: The regression ine was estimated over Source: Fow of Funds Accounts, Federa Reserve System, Author s cacuation. househods began shifting out of stocks and bonds, and they invested ony a sma share in stocks and bonds unti they shifted back in the eary 1980s. These past portfoio shifts aow a simpe test of whether consumption spending fuctuates more when househods invest heaviy in stocks and bonds. The voatiity of consumption is found to be unreated to the share of financia assets invested in stocks and bonds over the ast three decades (Chart 7). Consumption growth was actuay a bit ess voatie over when the share was high than over when the share was ow. And whie voatiity increased a itte in the mid-1980s after househods began shifting back into stocks and bonds, it has since decined to its historica average. 9 The stabiity of consumption during past portfoio shifts into stocks and bonds shoud assuage fears that the recent shift wi destabiize consumption spending. One possibe reason why shifts into stocks and bonds have not destabiized consumption is that consumption is not very sensitive to changes in weath. Researchers estimate that, as a rue, househods reduce their current consumption by ony about 5 cents for every doar decine in their weath (Brayton and Mauskopf). 10 Consistent with this rue, Garner estimates consumption fe by ony about $40 biion after the stock market crashed in 1987, which cost househods about $750 biion in weath. 11 Because househods now own more stock than in 1987, a proportionate drop

9 ECONOMIC REVIEW SECOND QUARTER Chart 7 Portfoio Shifts Have Not Destabiized Consumption Percent of househod financia assets 80 Percent Stocks and bonds (eft scae) Consumption voatiity (right scae) Note: Consumption voatiity is the standard deviation of monthy growth rate of rea persona consumption expenditures. Source: Fow of Funds Accounts, Federa Reserve System, Author s cacuation. in the market today woud cost househods about $1.3 triion in weath. In this event, according to the rue, consumption woud fa by ony about $66 biion, or about 1 percent of GDP. Another possibe reason why shifts to stocks and bonds do not increase the voatiity of aggregate consumption is that such shifts seem to merey reaocate risk among househods. Except for foreigners sma share, U.S. househods coectivey own a the businesses in the economy and so must utimatey bear the aggregate risk of a those businesses. The type of financia caims househods have against businesses stocks, bonds, or deposits merey aocates that risk across househods. Stockhoders bear the most risk, bondhoders bear ess risk, and deposit hoders bear the east risk. Substituting one caim for another seems to merey reaocate risk across househods without increasing the amount of risk in aggregate. 12 Suppose one househod uses its bank deposit to buy newy issued stock in a firm. That househod now shares risk with the firm s previous sharehoders, whose share of risk decines when the firm repays its bank oan with the proceeds from stock saes the oan funded with the first househod s deposit. Simiary, the shift out of federay insured bank deposits and defined contribution pension pans tends to reaocate risk across househods because househods utimatey pay the iabiities of the government with taxes. The shift out of insured assets reduces the iabiities of the agencies

10 40 FEDERAL RESERVE BANK OF KANSAS CITY that insure those assets, which in turn reduces the risk that taxpayers must bai out those agencies. Such risks are rea and substantia, as iustrated by the savings and oan baiout and by the current deficit of the Pension Benefit Guaranty Corporation (Becketti). This reasoning, and the evidence before it, suggests the recent portfoio shift merey reaocates risk to new investors. This reaocation itsef might increase aggregate risk if, however, new investors destabiize financia markets. Wi new investors destabiize financia markets? Some anaysts and journaists are concerned that the househods now investing in stocks and bonds wi destabiize financia markets. Others worry that pensions and mutua funds wi increase voatiity because these institutions trade more heaviy than househods. Househod investors. Some observers portray new househod investors as short-sighted novices who are misinformed about the risks they face. The image of new investors as short-sighted specuators possiby comes from the suspicion that househods began buying stocks and bonds recenty because of the steep yied curve and booming stock market. This suspicion breeds another: the recent investors are novices because they have not yet experienced a norma market correction. Seeming to support the suspicion that new investors are novices is a survey finding that two of every ten peope who purchased a stock or bond mutua fund between Juy 1991 and Juy 1993 were first-time buyers. 13 These novices may even be misinformed because, if they purchased stock and bond funds from a bank, they may think the mutua fund is federay insured. This profie of new househod investors seems distorted for severa reasons. First, househods appear to have shifted to stocks and bonds to save for retirement, not because they are short-sighted specuators. The ong-term investment goa of househods suggests they are prepared to ride out short-term drops in the market. Second, the new investors are not necessariy novices. Because househods began shifting their portfoios back in 1982, the 1987 stock market crash taught them the risks invoved. Moreover, the fraction of first-time buyers in recent years may be no higher than in the 1950s and 1960s. 14 Recent investors are certainy not young or uneducated: the survey of recent stock and bond fund investors found their median age was 44 and over haf had coege degrees. Third, ony a sma fraction of recent investors coud mistakeny beieve their stock and bond funds were federay insured. The same survey found ess than 10 percent of recent investors purchased such funds from a bank, and presumaby ony a fraction of those investors were misinformed. 15 For these reasons, a more accurate profie suggests the new househod investors are middeaged, we-educated investors pursuing a ongterm investment goa. Such investors seem unikey to behave in a manner that woud destabiize financia markets. Institutiona investors. Some anaysts aso worry that pensions and mutua funds coud increase market voatiity because these increasingy prominent institutions trade more activey than househods. Institutiona investors do indeed trade, or turn over, their assets more often than househods (Froot, Perod, and Stein). At the rate househods traded in the 12 months ending in 1990, for exampe, they woud take amost five years to turnover their portfoios. Pensions and mutua funds, in contrast, woud have turned over their portfoios in about two years at the rate they traded over that period. The more prominent market roe of such heavy traders coud therefore increase trading voume. The roe of institutiona traders has been trending up for 30 years, however, without noticeaby increasing the voatiity of stock prices (Chart 8). The standard deviation of the rea growth rate

11 ECONOMIC REVIEW SECOND QUARTER Chart 8 Institutiona Investors Have Not Destabiized Stock Prices Percent 40 Share of a stock managed by pension and mutua funds Stock price voatiity Note: Stock price voatiity is the standard deviation of the rea, monthy growth rate of the S&P 500. Source: Fow of Funds Accounts, Federa Reserve System, Author s cacuation. of stock prices every month, measured by the S&P index, has cyced up and down over this period without any trend. This simpe fact shoud hep dispe fears that institutiona investors wi destabiize financia markets. Foreign diversification and consumption The substitution of foreign for domestic stocks and bonds coud potentiay stabiize consumption. This caim seems paradoxica, given the greater voatiity and the exchange rate risk entaied by foreign investments. Despite those risks, investing abroad can stabiize consumption if fuctuations abroad mitigate fuctuations here. The benefit of diversifying abroad depends on the degree of correation between markets in the United States and abroad. A negative correation is most beneficia because increases abroad tend to cance decreases here. Foreign diversification is sti beneficia, however, as ong as markets are not perfecty correated which they are not. The average correation of rea, quartery stock returns over in the United States, Japan, Britain, France, Germany, and Canada was ony onehaf which means that a doar decine in the U.S. market is associated with ony a 50 cent decine on average in those foreign markets (French and Poterba). The stock market crash in 1987 iustrates this ow correation. The Standard and Poor s index fe 23 percent over the fourth

12 42 FEDERAL RESERVE BANK OF KANSAS CITY quarter of 1987, whie the Morgan Staney foreign index fe ony 11 percent, about haf as much. 16 Because of this ow correation, researchers agree that foreign diversification can stabiize weath despite the additiona exchange rate risk (Obstfed). Tesar and Warner cacuate that investing in the United States, Japan, Britain, Germany, and Canada with each country weighted according to its market share of a markets was safer over the 1980s than investing in just U.S. stocks or bonds, notwithstanding exchange rate risk. Moreover, investors can hedge against exchange rate fuctuations with a futures contract that guarantees a certain exchange rate, as many mutua funds do. CONCLUSION Concerns that the shift into stocks and bonds by househods wi destabiize aggregate consumption or financia markets seem exaggerated. Consumption remained stabe in the 1950s and 1960s when househods had as much invested in stocks and bonds as they do today. In addition, new investors are not ikey to destabiize financia markets. Househods seem to be investing for retirement and therefore are ikey to ride out short-run bumps in the market. And the roe of institutiona investors in the market has been trending up for 30 years without any accompanying trend in the voatiity of stock prices. ENDNOTES 1 The Federa Reserve s Fow of Funds measures bonds at book vaue and stocks at market vaue. Bonds incude a credit market instruments hed by househods. Hodings of each type of asset (stocks and bonds versus deposits and money market shares) incude direct and, as best as possibe, indirect hodings through mutua funds, ife insurance companies, pensions, and bank trusts. Hodings through private pensions, state and oca pensions, and bank trusts were decomposed into each type of asset using tabes L123, L124, and L133 from the Fow of Funds Tabes, September It was not possibe, however, to decompose hodings through mutua funds, ife insurance companies, and federa pensions so those hodings were assumed to be invested ony in stocks and bonds; that assumption is reasonabe because those institutions hod reativey sma amounts of deposits and money market shares. Hodings of each type of asset are expressed as a percentage of househod financia assets excuding security credit, misceaneous assets (direct and indirect), and noncorporate equity. 2 Some anaysts caim that the shift from direct stock and bond hodings to domestic mutua funds wi stabiize aggregate consumption because mutua funds are better diversified. This argument is a faacy of composition; individuas consumption may be more stabe foowing such a shift, but aggregate consumption is unaffected because variations in individuas consumption cance in aggregate. 3 These are the standard deviations of excess returns: the monthy return on stocks or bonds ess the hoding period return on a 30-day Treasury bi or Eurorate. 4 The growing popuarity of mutua funds over direct investment coud refect severa factors. Househods may better understand the benefits of diversification now. Mack discusses severa other possibe reasons. Increased advertising by mutua funds after the SEC adopted rue 12b-1 in 1980, which permits mutua funds to pay for advertising with their assets, may have increased their market share. The introduction of IRA and Keogh accounts in 1982 may aso have favored mutua funds to the extent mutua funds are more convenient for opening such accounts. The popuarity of mutua funds cannot refect decining costs, however; from 1982 to 1992 expenses of domestic stock funds rose from 1.08 percent of assets to 1.49 percent, whie expenses of bond funds remained constant at about 0.9 percent of assets (Mack). 5 These figures are annua averages. 6 Among short-term assets, bank deposits were especiay ow during the 1990s as banks seemed to ower their rates reative to other short-term rates in response to weak oan demand, reduced competition from the strugging thrift industry, and new capita requirements. 7 A third reason for not using the steep yied curve to expain the portfoio shift is that it assumes investors aocate their

13 ECONOMIC REVIEW SECOND QUARTER weath in response to current yieds rather than expected future yieds. 8 In particuar, the spread between the ten-year bond rate and the federa funds rate current, agged, or both was insignificant in expaining yeary changes in the share of assets hed in stocks and bonds, given the share of workers 35 or oder. Aternativey, the increased share of weath in stocks and bonds coud refect capita gains on existing hodings, rather than new infows. However, that expanation begs the question: after enjoying capita gains, why didn t househods re-baance their portfoios by shifting into safer deposits? Perhaps because househods were aging and therefore desired a arger share of weath invested in stocks and bonds. In any case, demographic shifts remain highy significant in expaining portfoio shifts even when the regression incudes the annua market return on the S&P 500 current, agged, or both; regardess of the specification, the demographic variabe has a t-statistic between 30 and 40. These regression resuts are avaiabe from the author. 9 The standard deviation of consumption growth was 0.47 percent over and 0.52 percent over The standard deviation was 0.76 percent over and 0.41 percent over These figures are the average over the period of the data potted in Chart 7. Those data are the standard deviation each year of the monthy growth rate of persona consumption expenditures. Athough monthy data seem to provide a more meaningfu measure of voatiity, using quartery consumption growth eads to the same concusion: the voatiity of quartery consumption growth tota or just durabes is unreated to the share of financia assets invested in stocks and bonds. 10 This sma estimated impact of changes in weath on consumption accords with the ife-cyce theory of consumption, which hods that househods wi reduce their spending graduay over their entire ifetime rather than a at once when their weath fas (Modigiani and Brumberg). 11 According to the rue, consumption woud fa $37.5 biion =.05 x $75. Consumption actuay decined by ony $1 biion over the fourth quarter of 1987 because income and other factors changed. Garner hed these other factors constant to isoate the impact of the crash on consumption. 12 The reaocation might have a sma, or second-order, effect on aggregate business risk if the firms managers were incined to pursue riskier investment projects as a resut of the changes in caims against it. 13 The survey of 1,000 peope was commissioned by The Investment Company Institute, a mutua fund trade association. 14 That new investors over the ast decade are investing through mutua funds, rather than directy in the market, suggests investors are more sophisticated than their counterparts in the 1950s and 1960s. Househods then were much more ikey to buy directy in the market than to invest through mutua funds, which is puzzing. Midde-cass investors tried to ower their risk by investing in reativey safe pubic utiities and, to a esser extent, mutua funds (Crockett and Friend). 15 It is impausibe that investors who purchased stock and bond mutua funds through brokers and directy from mutua funds woud beieve such purchases were insured. 16 The Morgan Staney index of stock markets in 24 countries is denominated in doars and so incudes exchange rate risk. REFERENCES Becketti, Sean Can Losses of Federa Financia Programs Be Reduced? Federa Reserve Bank of Kansas City, Economic Review, Juy/August, pp Beakey, Fred R Stock Drop Coud Have Broader Impact Now, Wa Street Journa, February 28. Brayton, Fint, and Eieen Mauskopf Structure and Uses of the MPS Quartery Econometric Mode of the United States, Board of Governors of the Federa Reserve System, Federa Reserve Buetin, February, pp Crockett, Jean, and Irwin Friend Characteristics of Stock Ownership, American Statistica Association, Proceedings of the Business and Economic Statistics Section, pp The Economist Mutuay Assured Destruction? October 9, p. 90. French, Kenneth R., and James M. Poterba Japanese and U.S. Cross-Border Common Stock Investments, Journa of the Japanese and Internationa Economies 4, December, pp Froot, Kenneth, Andre F. Perod, and Jeremy C. Stein Sharehoder Trading Practices and Corporate Investment Horizons, Nationa Bureau of Economic Research, Working Paper 3638, March. Garner, Aan Has the Stock Market Crash Reduced Consumer Spending? Federa Reserve Bank of Kansas City, Economic Review, Apri, pp

14 44 FEDERAL RESERVE BANK OF KANSAS CITY Hae, David D Economic Consequences of the American Mutua Fund Boom, Kemper Corporation Chicago. Davos Word Economic Forum, February. Karpoff, Jonathan M The Reation Between Price Changes and Trading Voume: A Survey, Journa of Financia and Quantitative Anaysis, vo. 22, no. 1, pp Kaufman, Henry Financia Derivatives and Their Risks, Centra Banking, Autumn, pp Kennicke, Arthur, and Janice Shack-Marquez Changes in Famiy Finances from 1983 to 1989: Evidence from the Survey of Consumer Finances, Board of Governors of the Federa Reserve System, Federa Reserve Buetin, vo. 78, no. 1, January, pp Koretz, Gene Mutua-Fund Mania: Danger Signa for the Fed? Business Week, January 17, p. 20. Kuhn, Susan E The New Perious Stock Market, Fortune, December 27, pp Jones, Jonathan, Kenneth Lehn, and Harod Muherin Institutiona Ownership of Equity: Effects on Stock Market Liquidity and Corporate Long-Term Investment, in Bickser and Sametz, eds., The Fiduciary Responsibiities of Institutiona Investors. New York: Dow Jones-Irwin, forthcoming. Lakonishok, Josef, Andrei Sheifer, and Robert W. Vishny The Impact of Institutiona Trading on Stock Prices, Journa of Financia Economics, vo. 32, no. 1, August, pp Mack, Phiip R Recent Trends in the Mutua Fund Industry, Board of Governors of the Federa Reserve System, Federa Reserve Buetin, November, pp Modigiani, Franco, and R.E. Brumberg Utiity Anaysis and the Consumption Function, in K.K. Kurihara, ed., Post-Keynesian Economics, New Brunswick, N.J.: Rutgers University Press. Mutua Fund Fact Book Investment Company Institute, 32d ed. Obstfed, Maurice Internationa Capita Mobiity in the 1990s, Nationa Bureau of Economic Research, Working Paper No. 4534, November. Private Pension Pan Buetin U.S. Department of Labor, Pension and Wefare Benefits Administration, Summer. Schwert, C. Wiiam Stock Market Voatiity, Financia Anaysts Journa, May-June. Stevenson, Merri Investment Management, The Economist, November 27, pp Tesar, Linda L., and Ingrid M. Werner Home Bias and the Gobaization of Securities Markets, Nationa Bureau of Economic Research, Working Paper 4218, November. Watson, Maxwe, Russe Kincaid, Caroine Atkinson, Eiot Kater, and David Fokerts-Landau Internationa Capita Markets Deveopments and Prospects, Washington, D.C.: Internationa Monetary Fund, December. Wayne, Lesie Investment Soars in Mutua Funds, Causing Concerns, The New York Times, September 7.

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