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Ignorance, Fixed Costs, and the Stock Market Participation Puzzle

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  • Alberto Naudon
  • Matías Tapia

Abstract

While the existence of fixed costs in entering asset markets is the leading rationalization of the "participation puzzle" -the fact that most households do not hold stocks, despite the diversification gains and the significant risk-premium involved-, most motivations of these fixed costs are as incompatible with conventional portfolio theory as the non participation itself. Nevertheless, we believe that these motivations are empirically correct, and thus we are forced to explore alternatives to conventional portfolio theory. We find in Choquet expected utility theory a tool that is better equipped to deal with more complex forms of ignorance than expected utility is. Within such model, we are able to express the idea that staying out of the market may be a rational response to the own ignorance. Within a Probit model for the 2001 Survey of Consumer Finances, we show suggestive evidence in its favor

Suggested Citation

  • Alberto Naudon & Matías Tapia, 2004. "Ignorance, Fixed Costs, and the Stock Market Participation Puzzle," Econometric Society 2004 Latin American Meetings 252, Econometric Society.
  • Handle: RePEc:ecm:latm04:252
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    References listed on IDEAS

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    Cited by:

    1. Apergis, Nicholas, 2015. "Financial portfolio choice: Do business cycle regimes matter? Panel evidence from international household surveys," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 14-27.
    2. Yu, Edison G., 2018. "Dynamic market participation and endogenous information aggregation," Journal of Economic Theory, Elsevier, vol. 175(C), pages 491-517.
    3. repec:vul:omefvu:v:8:y:2017:i:2:id:234 is not listed on IDEAS

    More about this item

    Keywords

    non additive beliefs; ambiguity; ignorance; asset market participation.;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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