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Entry Costs and Stock Market Participation over the Life Cycle

  • Sule Alan

    (York University)

Several explanations for the observed limited stock market participation have been offered in the literature. One of the most promising is the presence of market frictions mostly in the form of fixed entry and/or transaction costs. Empirical studies point to a significant structural (state) dependence in the the stock market entry decision, which is consistent with costs of this type. However, the magnitude of these costs is not yet known. This paper focuses on fixed stock market entry costs. I set up a structural estimation procedure which involves solving and simulating a life cycle intertemporal portfolio choice model augmented with a fixed stock market entry cost. Important features of household portfolio data (from the PSID) are matched to their simulated counterparts. Utilizing a Simulated Minimum Distance estimator, I estimate the coefficient of relative risk aversion, the discount factor and the stock market entry cost. Given the equity premium and the calibrated income process, I estimate a one-time entry cost of approximately 2 percent of the permanent component of the annual labor income. My estimated model matches the zero median holding as well as the hump-shaped age-participation profile observed in the data. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2006.06.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 4 (October)
Pages: 588-611

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Handle: RePEc:red:issued:05-99
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