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Stock market optimism and participation cost: a mean-variance estimation

  • Monica Paiella
  • Andrea Tiseno

This paper estimates the costs of participating to the stock market, together with the cross sectional dispersion of stock market optimism. Our analysis is based on a mean-variance framework, when there is a riskless asset (cash), which makes the allocation of the investment in risky assets (stocks and bonds) independent on preferences. Within this framework, we derive �structural� decision rules for the composition of the risky asset portfolio to be e�cient. These rules depend on the amount invested in the risky portfolio and on investors' optimism, which are the determinants of the stock market return expected by a household, when participation involves a �xed cost. Using these rules and the heterogeneity in risky assets holdings and in the degree of optimism, we identify both the fixed costs of stock investment This paper estimates the costs of participating to the stock market, together with the cross sectional dispersion of stock market optimism. Our analysis is based on a mean-variance framework, when there is a riskless asset (cash), which makes the allocation of the investment in risky assets (stocks and bonds) independent on preferences. Within this framework, we derive �structural� decision rules for the composition of the risky asset portfolio to be e�cient. These rules depend on the amount invested in the risky portfolio and on investors' optimism, which are the determinants of the stock market return expected by a household, when participation involves a �xed cost. Using these rules and the heterogeneity in risky assets holdings and in the degree of optimism, we identify both the fixed costs of stock investment

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 040.

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Date of creation: May 2005
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Handle: RePEc:dnb:dnbwpp:040
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  1. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
  2. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  3. Monica Paiella, 2007. "The Forgone Gains of Incomplete Portfolios," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1623-1646, 2007 13.
  4. Attanasio, Orazio P., 1999. "Consumption," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 11, pages 741-812 Elsevier.
  5. Panetta, F. & Violi, R., 1999. "Is there an Equity Premium Puzzle in Italy? A Look at Asset Returns, Consumption and Financial Structure Data Over the Last Century," Papers 353, Banca Italia - Servizio di Studi.
  6. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Carol C. Bertaut, 1998. "Stockholding Behavior Of U.S. Households: Evidence From The 1983-1989 Survey Of Consumer Finances," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 263-275, May.
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