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Trusting the Stock Market

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Author Info
Guiso, Luigi
Sapienza, Paola
Zingales, Luigi

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5288.

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Date of creation: Oct 2005
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Handle: RePEc:cpr:ceprdp:5288

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Keywords: portfolio choice stock market participation trust

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Find related papers by JEL classification:
D1 - Microeconomics - - Household Behavior
D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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References listed on IDEAS
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  27. Ghirardato, Paolo & Maccheroni, Fabio & Marinacci, Massimo, 2004. "Differentiating ambiguity and ambiguity attitude," Journal of Economic Theory, Elsevier, vol. 118(2), pages 133-173, October. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. S. Nuri Erbas & Abbas Mirakhor, 2007. "The Equity Premium Puzzle, Ambiguity Aversion, and Institutional Quality," IMF Working Papers 07/230, International Monetary Fund. [Downloadable!]
  2. Dorn, Daniel & Huberman, Gur, 2007. "Preferred Risk Habitat of Individual Investors," CEPR Discussion Papers 6532, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2006. "Does Culture Affect Economic Outcomes?," CEPR Discussion Papers 5505, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Laura Bottazzi & Marco Da Rin & Thomas Hellmann, . "The Importance of Trust for Investment: Evidence from Venture Capital," Working Papers 325, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  6. Maarten van Rooij & Annamaria Lusardi & Rob Alessi, 2007. "Financial literacy and stock market participation," DNB Working Papers 146, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  7. Mehmet Fatih Ekinci & Sebnem Kalemli-Ozcan & Bent Sorensen, 2007. "Financial Integration within EU Countries: The Role of Institutions, Confidence and Trust," NBER Working Papers 13440, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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