The Forgone Gains of Incomplete Portfolios

Posted: 26 Jun 2008

See all articles by Monica Paiella

Monica Paiella

University of Naples Federico II

Multiple version iconThere are 2 versions of this paper

Date Written: 2007

Abstract

This article proposes a test for the cost-based explanation of nonparticipation, by estimating a lower bound to the forgone gains of incomplete portfolios; these are in turn a lower bound to the costs that could rationalize nonparticipation in financial markets: high bounds would imply implausibly high costs. Assuming isoelastic utility and a relative risk aversion of three or less, for the stock market I estimate an average lower bound of between 0.7 and 3.3 percent of consumption. Since total annual (observable plus unobservable) participation costs are likely to exceed these bounds, the cost-based explanation is not rejected by this test.

Keywords: G11, D12, E21

Suggested Citation

Paiella, Monica, The Forgone Gains of Incomplete Portfolios (2007). The Review of Financial Studies, Vol. 20, Issue 5, pp. 1623-1646, 2007, Available at SSRN: https://ssrn.com/abstract=1151562 or http://dx.doi.org/10.1093/rfs/hhm022

Monica Paiella (Contact Author)

University of Naples Federico II ( email )

Via Amm. F. Acton, 38
80133 Naples, Caserta 80133
Italy

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