Does It Pay to Invest? The Personal Equity Risk Premium and Stock Market Participation

46 Pages Posted: 4 Sep 2020

Date Written: July 27, 2020

Abstract

Individuals’ stock market participation depends on the risk–return trade-off they expect to achieve from investing. We argue that the expected economic benefits from investing are highly heterogeneous. To capture these benefits, we define the personal equity risk premium (PERP) as the difference between an individual’s expected stock return and personal opportunity cost of capital. We find that the PERP is a significant determinant of stock market participation. Our results hold after we control for known factors, such as financial literacy, trust, and loss aversion. The results are stronger when we analyze the level of stock investment. Disentangling the PERP into its two components shows that both contribute to explain both stock market participation and the level of participation.

Keywords: stock market participation, equity risk premium, financial literacy, trust, loss aversion

JEL Classification: D14, G11, G41, G51, G53

Suggested Citation

Merkoulova, Yulia and Veld, Chris, Does It Pay to Invest? The Personal Equity Risk Premium and Stock Market Participation (July 27, 2020). Available at SSRN: https://ssrn.com/abstract=3661024 or http://dx.doi.org/10.2139/ssrn.3661024

Yulia Merkoulova

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Chris Veld (Contact Author)

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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