Policy Uncertainty and Household Stock Market Participation
55 Pages Posted: 22 Feb 2018
Date Written: February 12, 2018
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: Suggested Citation