One good reason why risk preference would be bimodal: the Volker rule. Banks are generally prohibited and/or penalized for holding riskier asset classes. Both regulations and intrabank risk rules stipulate maximum leverage ratios for each asset class. Meanwhile, non-banks usually just can’t get leverage ratios anywhere near what banks get, at all.
So, you get one class of investors (banks) who use high leverage to buy safe assets, pushing their return down very low. The returns on those assets are then too low for non-banks to hold them in large quantities, so non-banks hold the riskier stuff with bimodal returns.
I don’t know how well this represents reality, but that’s how I’ve thought about it for a while now.
One good reason why risk preference would be bimodal: the Volker rule. Banks are generally prohibited and/or penalized for holding riskier asset classes. Both regulations and intrabank risk rules stipulate maximum leverage ratios for each asset class. Meanwhile, non-banks usually just can’t get leverage ratios anywhere near what banks get, at all.
So, you get one class of investors (banks) who use high leverage to buy safe assets, pushing their return down very low. The returns on those assets are then too low for non-banks to hold them in large quantities, so non-banks hold the riskier stuff with bimodal returns.
I don’t know how well this represents reality, but that’s how I’ve thought about it for a while now.