What Drives Equity Market Non-Participation?

North American Journal of Economics and Finance, January 2012, vol. 23, no 1, 86-114

54 Pages Posted: 1 Dec 2003 Last revised: 9 Jan 2017

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Date Written: November 1, 2003

Abstract

This paper produces endogenous equity market non-participation in an economy with uninsurable labor income risk and heterogeneous skill levels. Prudence and impatience generate stationary household wealth levels that depend on income. Skill, and therefore labor income, heterogeneity leads to wealth heterogeneity, with high skill households accumulating high wealth and low skill households accumulating low wealth. A HARA class utility with subsistence consumption requirement generates decreasing RRA with respect to household wealth. Consequently, low skill households also have significantly higher local RRA. In addition low skill households have less human capital and therefore have lower diversification demand for stocks. Low wealth, high RRA and low diversification demand predicts that low skill households do not hold stocks in the face of a moderate ownership cost. In addition, the model predicts a humped lifecycle wealth accumulation pattern and a humped lifecycle stock allocation pattern. I also find that stockholders exhibit a greater aggregate willingness to supply risky capital during the expansion phase of a business cycle, despite the lower conditional equity premium.

Keywords: Equity Market Non-participation, Portfolio Choice, Endogenous Wealth Heterogeneity

JEL Classification: G11, D31, D91, E21

Suggested Citation

Hsu, Jason C., What Drives Equity Market Non-Participation? (November 1, 2003). North American Journal of Economics and Finance, January 2012, vol. 23, no 1, 86-114. Available at SSRN: https://ssrn.com/abstract=473426 or http://dx.doi.org/10.2139/ssrn.473426

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

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Los Angeles, CA 90095-1481
United States

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