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Do Stockholders Share Risk More Effectively Than Non- stockholders?

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Author Info
Fatih Guvenen (University of Rochester)

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Abstract

This paper analyzes the extent of risk-sharing among stockholders and among nonstockholders. Wealthy households play a crucial role in many economic problems due to the substantial concentration of asset holdings in the U.S. data. Hence, to evaluate the empirical importance of market incompleteness, it is essential to determine if idiosyncratic shocks are important for the wealthy, who have access to better insurance opportunities, but also face different risks, than the average household. We study a model where each period households decide whether to participate in the stock market by paying a fixed cost. Due to this endogenous entry decision, the testable implications of perfect risk- sharing take the form of a sample selection model, which we estimate and test using a semi-parametric GMM estimator proposed by Kyriazidou (2001). Using data from PSID we strongly reject perfect risk-sharing among stockholders, but perhaps surprisingly, do not find evidence against it among non-stockholders. These results appear to be robust to several extensions we considered. These findings indicate that market incompleteness may be more important for the wealthy, and suggest further focus on risk factors that primarily affect this group, such as entrepreneurial income risk.

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Paper provided by EconWPA in its series Macroeconomics with number 0508006.

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Length: 28 pages
Date of creation: 06 Aug 2005
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Handle: RePEc:wpa:wuwpma:0508006

Note: Type of Document - pdf; pages: 28
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Related research
Keywords: Perfect risk-sharing; incomplete markets; semiparametric estimation; Generalized Method of Moments; limited stock market participation.;

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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.:
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Full references

Cited by:
(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. Santos Monteiro, Paulo, 2008. "Testing Full Consumption Insurance in the Frequency Domain," The Warwick Economics Research Paper Series (TWERPS) 874, University of Warwick, Department of Economics. [Downloadable!]
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