Stock Market Participation

Question 1

Why should someone invest in stocks?

Answer 1

Huge effect on wealth accumulation

Question 2

What is the “Holy Grail” in an Academic Perspective

Answer 2

Understanding non-participation in the stock market, especially among wealthy individuals

Question 3

What are the implications of a life-cycle model with two assets w.r.t stock market participation

Answer 3

Households want to maximize lifetime utility. They allocate their wealth to two assets, 1 risky 1 safe. Given a risk premium E(Rt+1) > Rf risky stocks dominate the safe asset. Zero stockholding is non-optimal.

Question 4

What type of risk matters for stock market participation

Answer 4

Agents want to address consumption risk. It is not idiosyncratic risk that matters

Question 5

Edet empirical Findings show that:

Answer 5

A majority of households do not invest in stocks (Stock market participation puzzle)

Question 6

What are three explanations to non-participation

Answer 6

• Cost Based Explanation
• Belief Based Explanation
• Preference Based Explanation

Question 7

Cost Based Explanation:

Answer 7

Fixed Cost of Participation:
- First time entrants face fixed cost
- Continuation cost
*Monetary Cost: Fees
*Non-Monetary Cost: Time Cost, Cognitive Cost
*Perceived Cost: beliefs about return, and monetary cost

Question 8

Evidence to Cost Based Explanation

Answer 8

• S-Participation is higher among groups with lower cognitive cost
  Non-Monetary Cost contribute to non-participation

Question 9

Wealth effect

Answer 9

Empirically wealth is strongly positively correlated with participation.
-> Strong wealth effect
But: Wealth is not randomly assigned. Correlated with other factors that drive non participation

Question 10

Are there studies that analyze participation amongst wealthy individuals

Answer 10

Lottery winner S-participation:
Lottery wins only increase participation by 12 pp. Other factors must contribute.

Question 11

Belief Based Explanation:

Answer 11

E.g. Excessive Pesimism
i) Perception of non positive equity premium
-> Empirical support
ii) Underestimation of positive equity premium

Question 12

Empirically Perceived Non-Monetary Cost:

Answer 12

Picking Right stocks
Monitoring the market
Adjusting the portfolio frequently

Question 13

Perceived cognitive cost of participation:

Answer 13

• Picking the right stock
• Monitoring the market
• Frequently adjusting the portfolio