The Forgone Gains of Incomplete Portfolios

42 Pages Posted: 24 May 2007

See all articles by Monica Paiella

Monica Paiella

CSEF - University of Naples Federico II

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Date Written: April 2007

Abstract

This paper proposes a test for the cost-based explanation of non-participation, by estimating a lower bound to the forgone gains of incomplete portfolios; these are in turn a lower bound to the costs that could rationalize non-participation in financial markets: high bounds would imply implausibly high costs. Assuming isoelastic utility and a relative risk aversion of 3 or less, for the stock market I estimate an average lower bound of between 0.7 and 3.3 percent of consumption. Since total annual (observable plus unobservable) participation costs are likely to exceed these bounds, the cost-based explanation is not rejected by this test.

Keywords: intertemporal consumption model, financial market participation, household portfolio allocation, non-proportional costs of participation

JEL Classification: E21, G11, D12

Suggested Citation

Paiella, Monica, The Forgone Gains of Incomplete Portfolios (April 2007). Bank of Italy Temi di Discussione (Working Paper) No. 625, Available at SSRN: https://ssrn.com/abstract=988103 or http://dx.doi.org/10.2139/ssrn.988103

Monica Paiella (Contact Author)

CSEF - University of Naples Federico II ( email )

Via Amm. F. Acton, 38
80133 Naples, Caserta 80133
Italy

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