Stock Market Investment: The Role of Human Capital

62 Pages Posted: 8 Oct 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: 2015-06-14

Abstract

Participation in the stock market is limited, especially early in life. By contrast, human capital investment is widespread, especially early in life. Returns to equity are constant across households, while returns to human capital vary. The contribution of this paper is to demonstrate that once human capital investment is allowed for and, critically, disciplined to match observed dispersion in earnings, an entirely standard model of portfolio choice delivers stock market participation rates consistent with the data over the entire life cycle. Moreover, we show that endogenizing human capital strongly alters the role of borrowing costs in limiting stock market participation.

Keywords: Human capital investment, Life-cycle, Financial portfolios

JEL Classification: E21, G11, J24

Suggested Citation

Athreya, Kartik and Ionescu, Felicia and Neelakantan, Urvi, Stock Market Investment: The Role of Human Capital (2015-06-14). FEDS Working Paper No. 2015-65. Available at SSRN: https://ssrn.com/abstract=2671012 or http://dx.doi.org/10.17016/FEDS.2015.065r1

Kartik Athreya (Contact Author)

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

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

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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