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Stock Market Investment: The Role of Human Capital

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  • Kartik B. Athreya
  • Felicia Ionescu
  • Urvi Neelakantan

Abstract

Portfolio choice models counter factually predict (or advise) almost universal equity market participation and a high share for equity in wealth early in life. Empirically consistent predictions have proved elusive without participation costs, informational frictions, or non standard preferences. We demonstrate that once human capital investment is allowed, standard theory predicts portfolio choices much closer to those empirically observed. Two intuitive mechanisms are at work: For participation, human capital returns exceed financial asset returns for most young households and, as households age, this is reversed. For shares, risks to human capital limit the household's desire to hold wealth in risky financial equity.

Suggested Citation

  • Kartik B. Athreya & Felicia Ionescu & Urvi Neelakantan, 2015. "Stock Market Investment: The Role of Human Capital," Working Paper 15-7, Federal Reserve Bank of Richmond.
  • Handle: RePEc:fip:fedrwp:15-07
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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