Limited Stock Market Participation and the Equity Premium
17 Pages Posted: 17 Dec 2001
Date Written: December 2001
In this paper I study the implications of limited stock market participation for the equity premium. If all agents are receiving labor income and there is a small fixed cost of trading equities, then those agents with relatively low labor income choose not to participate in equity market. Because of limited risk sharing, the equity premium is higher, but only slightly higher, than in a model without frictions and full equity market participation. Thus, limited stock market participation does not resolve the equity premium puzzle.
Keywords: limited stock market participation, equity premium
JEL Classification: G12
Suggested Citation: Suggested Citation