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Limited Stock Market Participation and the Equity Premium

Valery Polkovnichenko
University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

December 2001

Abstract:
In this paper I study the implications of limited stock market participation for the equity premium. If all agents are receiving labor income and there is a small fixed cost of trading equities, then those agents with relatively low labor income choose not to participate in equity market. Because of limited risk sharing, the equity premium is higher, but only slightly higher, than in a model without frictions and full equity market participation. Thus, limited stock market participation does not resolve the equity premium puzzle.

Keywords: limited stock market participation, equity premium

JEL Classifications: G12

Working Paper Series

Date posted: December 17, 2001 ; Last revised: January 07, 2002

Suggested Citation

Polkovnichenko, Valery, Limited Stock Market Participation and the Equity Premium (December 2001). Available at SSRN: http://ssrn.com/abstract=293830 or doi:10.2139/ssrn.293830

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Contact Information

Valery Polkovnichenko (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

HOME PAGE: http://www.utdallas.edu/~polkovn/