Trusting the Stock Market
Abstract
We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross-country data.Download Info
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Bibliographic Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5288.Length:
Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5288
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Related research
Keywords: portfolio choice; stock market participation; trust;Other versions of this item:
- Luigi Guiso & Paola Sapienza & Luigi Zingales, 2008. "Trusting the Stock Market," Journal of Finance, American Finance Association, vol. 63(6), pages 2557-2600, December.
- Luigi Guiso & Paola Sapienza & Luigi Zingales, 2005. "Trusting the Stock Market," CFS Working Paper Series 2005/27, Center for Financial Studies.
- Luigi Guiso & Paola Sapienza & Luigi Zingales, 2005. "Trusting the Stock Market," NBER Working Papers 11648, National Bureau of Economic Research, Inc.
- D1 - Microeconomics - - Household Behavior
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-09 (All new papers)
- NEP-BEC-2005-12-09 (Business Economics)
- NEP-FMK-2005-12-09 (Financial Markets)
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