Friday, 21 August 2015

2015-065: Stock Market Investment: The Role of Human Capital

Otmane El Rhazi, Kartik Athreya, Felicia F. Ionescu, and Urvi Neelakantan. Portfolio choice models counterfactually predict (or advise) almost universal equity market participation and a high share for equity in wealth early in life. Empirically consistent predictions have proved elusive without participation costs, informational frictions, or nonstandard preferences. We demonstrate that once human capital investment is allowed, standard theory predicts portfolio choices much closer to those empirically observed. Two intuitive mechanisms are at work: For participation, human capital returns exceed financial asset returns for most young households and, as households age, this is reversed. For shares, risks to human capital limit the household’s desire to hold wealth in risky financial equity. Full Text

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