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Why have U.S. households increasingly relied on mutual funds to own equity?

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  • John V. Duca

Abstract

Since the early 1990s, U.S. households have increasingly used mutual funds to own equity assets. Results indicate that this owes to two developments over the period 1970–2002 that are broadly consistent with the implications of Heaton and Lucas’ (2000) model of equity participation. In that model, lower asset transfer costs and lower income risk can induce equity investing by less wealthy households, who—in practice and owing to diversification considerations—are more apt to indirectly hold stocks through mutual funds. The first factor is a pronounced decline in equity mutual fund loads, which are highly negatively correlated with the overall stock ownership rate, which has doubled owing to a rising percentage of households that own stocks only through mutual funds. The second is a general improvement since the 1970s in household expectations about future family financial conditions that may have induced households at the margin to become shareholders.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0403.

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Date of creation: 2004
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Handle: RePEc:fip:feddwp:04-03

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Cited by:
  1. Duca, John V., 2010. "Did the Commercial Paper Funding Facility Prevent a Great Depression Style Money Market Meltdown?," MPRA Paper 29255, University Library of Munich, Germany, revised 22 Feb 2011.
  2. Duca, John V., 2014. "What drives the shadow banking system in the short and long run?," Working Papers 1401, Federal Reserve Bank of Dallas.

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