Stock Market Investment: The Role of Human Capital

Posted: 13 Aug 2015 Last revised: 6 Feb 2018

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Anamaria Felicia Ionescu

Board of Governors of the Federal Reserve System

Urvi Neelakantan

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 3 versions of this paper

Date Written: 2015-07-20

Abstract

Portfolio choice models counter factually predict (or advise) almost universal equity market participation and a high share for equity in wealth early in life. Empirically consistent predictions have proved elusive without participation costs, informational frictions, or non standard preferences. We demonstrate that once human capital investment is allowed, standard theory predicts portfolio choices much closer to those empirically observed. Two intuitive mechanisms are at work: For participation, human capital returns exceed financial asset returns for most young households and, as households age, this is reversed. For shares, risks to human capital limit the household's desire to hold wealth in risky financial equity.

JEL Classification: E21, G11, J24

Suggested Citation

Athreya, Kartik and Ionescu, Anamaria Felicia and Neelakantan, Urvi, Stock Market Investment: The Role of Human Capital (2015-07-20). FRB Richmond Working Paper No. 15-7, Available at SSRN: https://ssrn.com/abstract=2643143

Kartik Athreya (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Anamaria Felicia Ionescu

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Urvi Neelakantan

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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