Savings Selectivity Bias, Subjective Expectations, and Stock Market Participation
32 Pages Posted: 18 Dec 2009 Last revised: 30 Jul 2013
Date Written: October 23, 2009
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: Suggested Citation