Savings Selectivity Bias, Subjective Expectations, and Stock Market Participation

32 Pages Posted: 18 Dec 2009 Last revised: 30 Jul 2013

See all articles by Yosef Bonaparte

Yosef Bonaparte

University of Colorado at Denver - Department of Finance

Frank J. Fabozzi

EDHEC Business School

Date Written: October 23, 2009

Abstract

Studies of household stock market participation report low participation rates. The explanations cited are that the fixed costs associated with participation and high risk aversion discourage households from buying stocks. However, the low participation rate findings are unchallenged. We argue that because prior studies fail to recognize that not all households save, there exists a selection bias when estimating the household participation rate. After correcting for this selection bias, as well as accounting for the influence of subjective expectations on market participation, we show that the unconditional probability of participating in the stock market would increase twofold.

Keywords: Stock market participation, rational expectation, income shock, search behavior, saving behavior, sample selection

JEL Classification: D01, D11, D12, D81, D83, D84, G10, G11

Suggested Citation

Bonaparte, Yosef and Fabozzi, Frank J., Savings Selectivity Bias, Subjective Expectations, and Stock Market Participation (October 23, 2009). Applied Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=892281 or http://dx.doi.org/10.2139/ssrn.892281

Yosef Bonaparte (Contact Author)

University of Colorado at Denver - Department of Finance ( email )

United States

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

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