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

  • Andrea Tiseno


    (Banca D'Italia public)

  • Monica Paiella

Using Italian household data we jointly estimate the yearly cost of participating to the stock market and the cross sectional distribution of optimism about excess returns of stocks over bonds. Using mean-variance analysis we derive individual efficient portfolio allocation rules, as functions of amount invested and optimism, which provide a structural latent variable model. The observed heterogeneity in amounts invested and in risky portfolio allocations delivers identification: we estimate a yearly cost of participation of about 100 euro and a standard deviation of 30% in optimism

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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 714.

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Date of creation: 03 Dec 2006
Date of revision:
Handle: RePEc:red:sed006:714
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Monica Paiella, 2007. "The forgone gains of incomplete portfolios," Temi di discussione (Economic working papers) 625, Bank of Italy, Economic Research and International Relations Area.
  2. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
  3. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  4. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
  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. 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.
  7. 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.
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