Policy Uncertainty and Household Stock Market Participation

55 Pages Posted: 22 Feb 2018  

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Hadiye Aslan

Georgia State University - Department of Finance

Honglin Ren

Georgia State University - J. Mack Robinson College of Business

Date Written: February 12, 2018

Abstract

Using a unique micro-level panel dataset, we relate households’ stock market participation to policy uncertainty. We show that households significantly reduce their equity participation during periods of high policy uncertainty, identified by gubernatorial elections. The magnitude of the participation cycles varies with risk aversion, employment risk, and cost of processing information. In certain situations, election-triggered drop in participation is followed by a partial increase in post-election years as the uncertainty over policy outcomes subsides, reflecting a real distortion. Our findings suggest that policy uncertainty is an important channel through which the political process creates a negative externality in financial markets.

Keywords: Household finance, Policy uncertainty, Portfolio choice, Stock market participation

JEL Classification: D14, G11, G18

Suggested Citation

Agarwal, Vikas and Aslan, Hadiye and Ren, Honglin, Policy Uncertainty and Household Stock Market Participation (February 12, 2018). Available at SSRN: https://ssrn.com/abstract=3122855 or http://dx.doi.org/10.2139/ssrn.3122855

Vikas Agarwal

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Hadiye Aslan (Contact Author)

Georgia State University - Department of Finance ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

Honglin Ren

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

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