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Do Stockholders Share Risk More Effectively than Non-Stockholders?

Fatih Guvenen

University of Minnesota - Department of Economics; National Bureau of Economic Research (NBER)

July 11, 2005

Review of Economics and Statistics, Vol. 89, No. 2, 2007

This paper analyzes the extent of risk-sharing among stockholders and among nonstockholders. Wealthy households play a crucial role in many economic problems due to the substantial concentration of asset holdings in the U.S. data. Hence, to evaluate the empirical importance of market incompleteness, it is essential to determine if idiosyncratic shocks are important for the wealthy, who have access to better insurance opportunities, but also face different risks, than the average household. We study a model where each period households decide whether to participate in the stock market by paying a fixed cost. Due to this endogenous entry decision, the testable implications of perfect risk-sharing take the form of a sample selection model, which we estimate and test using a semi-parametric GMM estimator proposed by Kyriazidou (2001). Using data from PSID we strongly reject perfect risk-sharing among stockholders, but perhaps surprisingly, do not find evidence against it among non-stockholders. These results appear to be robust to several extensions we considered. These findings indicate that market incompleteness may be more important for the wealthy, and suggest further focus on risk factors that primarily affect this group, such as entrepreneurial income risk.

Number of Pages in PDF File: 28

Keywords: Perfect risk-sharing, incomplete markets, semiparametric estimation

JEL Classification: C33, G11, D52

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Date posted: January 5, 2006 ; Last revised: August 26, 2011

Suggested Citation

Guvenen, Fatih, Do Stockholders Share Risk More Effectively than Non-Stockholders? (July 11, 2005). Review of Economics and Statistics, Vol. 89, No. 2, 2007. Available at SSRN: http://ssrn.com/abstract=318028 or http://dx.doi.org/10.2139/ssrn.318028

Contact Information

Fatih Guvenen (Contact Author)
University of Minnesota - Department of Economics ( email )
Minneapolis, MN 55455
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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