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Social Interaction and Stock-Market Participation

  • Harrison Hong
  • Jeffrey D. Kubik
  • Jeremy C. Stein

We investigate the idea that stock-market participation is influenced by social interaction. We build a simple model in which any given 'social' investor finds it more attractive to invest in the market when the participation rate among his peers is higher. The model predicts higher participation rates among social investors than among 'non-socials'. It also admits the possibility of multiple social equilibria. We then test the theory using data from the Health and Retirement Study. Social households - defined as those who interact with their neighbors, or who attend church - are indeed substantially more likely to invest in the stock market than non-social households, controlling for other factors like wealth, race, education and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8358.

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Date of creation: Jul 2001
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Publication status: published as Hong, Harrison, Jeffrey D. Kubik and Jeremy C. Stein. "Social Interaction And Stock-Market Participation," Journal of Finance, 2004, v59(1,Feb), 137-163.
Handle: RePEc:nbr:nberwo:8358
Note: AP CF
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