Working Papers: Raman Uppal

 

Current working papers

My main research interest is studying the impact of various frictions on portfolio choice and asset prices; most of this research is undertaken in a general equilibrium setting. My current research  focuses mainly on financial regulation, which I study in general equilibrium models with production. I am interested also in studying the design of portfolios that perform well out of sample.


My working papers are listed below (arranged alphabetically by last name of author), along with an abstract of each paper.


  1. 1.Buss, A., B. Dumas, R. Uppal, and G. Vilkov, 2013, “Comparing Different Regulatory Measures to Control Stock Market Volatility: A General Equilibrium Analysis.”

  2. In this paper, we compare the effects on the financial and real sectors of three regulatory measures in a general equilibrium model with production: constraint on borrowing (leverage); constraint on short-selling; and, a (Tobin) tax on financial transactions. The main conclusion of the paper is that the constraint on short-selling and the Tobin tax have mostly negative consequences for the real and financial sectors, in contrast to the leverage constraint, which has a positive effect on both the real and financial sectors.


  1. 2.Buss, A., R. Uppal, and G. Vilkov, 2013, “Asset Prices in General Equilibrium with Recursive Utility and Illiquidity Induced by Transaction Costs.”

  2. In this paper, we consider a general equilibrium model where investors are heterogeneous with respect to their idiosyncratic labor income, risk aversion, and beliefs, and face proportional transaction costs for trading one of two risky stocks. In this model, we evaluate the effect of the transaction cost on the consumption and portfolio choices of investors, and on asset returns, with the focus being on the liquidity premium. We find that other than reducing the volume of trading, the transaction cost has only a small effect on all other quantities. In particular, the liquidity premium is only about one-fifth the size of the transaction cost, contrary to the findings of partial-equilibrium models.


  1. 3.Plyakha, Y., R. Uppal, and G. Vilkov, 2013, “Equal or Value Weighting? Implications for Asset-Pricing Tests.”

  2. In this paper, we compare the returns on equal- and value-weighted portfolios. We have three main results. One, we show that the equal-weighted portfolio outperforms the value-weighted portfolio. Two, we find that about 60% of the higher return is because the equal-weighted portfolio has higher exposure to systematic risk factors (such as size and value), but 40% of the higher return is a consequence of the higher alpha; we then demonstrate that the higher alpha arises from the rebalancing entailed in maintaining constant weights of the equal-weighted portfolio. Three, we show that the choice of equal- or value-weighting affects the inferences drawn from asset-pricing tests.


  3. 4.Bhamra, H. and R. Uppal, 2013, “Does Household Finance Matter?”

  4. The literature on household finance has documented that households make several mistakes when making investment decisions. One of these mistakes is to invest in only a few stocks. In this paper, we study the effect on consumption, production, investment, and welfare of the behavior of households to hold underdiversified portfolios. We develop a model of a stochastic, dynamic, general-equilibrium economy with a large number of production sectors, and we specify that households are more ambiguous about the returns of some of these sectors compared to the returns of a few, familiar, sectors. Consequently, households invest in only the few familiar stocks, leading to portfolios that are underdiversified. We solve this model analytically and illustrate that underdiversification has substantial effects on the real sector and the welfare of households. Our paper has strong policy implications for financial education and financial regulation.