Stock Market Investment: The Role of Human Capital

FEDS Working Paper No. 2015-065

http://dx.doi.org/10.17016/FEDS.2015.065

46 Pages Posted: 26 Aug 2015

See all articles by Kartik Athreya

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

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: June 14, 2015

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 nonstandard 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.

Keywords: Financial Portfolios, Human Capital Investment, Life-cycle

JEL Classification: E21, G11, J24

Suggested Citation

Athreya, Kartik and Ionescu, Felicia and Neelakantan, Urvi, Stock Market Investment: The Role of Human Capital (June 14, 2015). http://dx.doi.org/10.17016/FEDS.2015.065. Available at SSRN: https://ssrn.com/abstract=2650642 or http://dx.doi.org/10.2139/ssrn.2650642

Kartik Athreya

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

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

Felicia Ionescu (Contact Author)

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

Register to save articles to
your library

Register

Paper statistics

Downloads
43
Abstract Views
476
PlumX Metrics