IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper

Does Stockholding Provide Perfect Risk Sharing?

This paper analyzes the extent of risk-sharing among stockholders. To provide a benchmark, we ask if stockholders are able to share risk more effectively than non-stockholders, where the latter serves as a control group. We study a dynamic structural model where each period households compare the benefits from stockholding with a per-period trading cost and decide whether to be in the stock market. Due to the endogenous entrym decision, the testable implications of perfect risk-sharing take the form of a sample selection model. To eliminate the selection bias, we implement a semiparametric estimation method (kernel-weighted GMM) recently proposed by Kyriazidou (2001). Using data from the Panel Study of Income Dynamics on U.S. households we find a surprising result: We strongly reject perfect risk-sharing for stockholders, but find no evidence against it among non-stockholders. Moreover, we also strongly reject risk-sharing for the whole population consistent with existing literature. We offer two explanations. First, if financial markets are incomplete, holding stocks may expose owners to extra risks more than it insures existing risks. Second, stockholders also own a large part of the entrepreneurial wealth which is largely uninsurable. Thus, stockholders not only have more assets for risk sharing but also have more risks to insure. These results suggest that these two groups face different economic environments and solve quite different optimization problems. Finally, we find significant heterogeneity in the risk aversion and leisure elasticities between the two groups. We conclude that the distinction between stockholders and non-stockholders is crucial in exploring many questions in macroeconomics and finance.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_490.pdf
File Function: full text
Download Restriction: None

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 490.

as
in new window

Length: 52 pages
Date of creation: May 2002
Date of revision: Mar 2003
Handle: RePEc:roc:rocher:490
Contact details of provider: Postal:
University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. N. Gregory Mankiw & Stephen P. Zeldes, 1990. "The Consumption of Stockholders and Non-Stockholders," NBER Working Papers 3402, National Bureau of Economic Research, Inc.
  2. Monica Paiella, 2001. "Limited Financial Market Participation: A Transaction Cost-Based Explanation," Temi di discussione (Economic working papers) 415, Bank of Italy, Economic Research and International Relations Area.
  3. Laurent-Emmanuel Calvet & George-Marios Angeletos, 2003. "Idiosyncratic Production Risk, Growth and the Business Cycle," Working Papers hal-00593392, HAL.
  4. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-94, March.
  5. Gourinchas, P.O. & Parker, J.A., 1997. "Consumption Over the Life Cycle," Working papers 9722, Wisconsin Madison - Social Systems.
  6. Orazio Attanasio & Steven J. Davis, 1994. "Relative Wage Movements and the Distribution of Consumption," NBER Working Papers 4771, National Bureau of Economic Research, Inc.
  7. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  8. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  9. Ekaterini Kyriazidou, 1997. "Estimation of a Panel Data Sample Selection Model," Econometrica, Econometric Society, vol. 65(6), pages 1335-1364, November.
  10. Attanasio, O.P. & Browning, M.J., 1993. "Consumption over the life cycle and over the business cycle," Discussion Paper 1993-14, Tilburg University, Center for Economic Research.
  11. Martin S. Eichenbaum & Lars Peter Hansen & Kenneth J. Singleton, 1986. "A Time Series Analysis of Representative Agent Models of Consumption andLeisure Choice Under Uncertainty," NBER Working Papers 1981, National Bureau of Economic Research, Inc.
  12. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
  13. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-87, June.
  14. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
  15. Alon Brav & George M. Constantinides & Christopher C. Geczy, 1999. "Asset Pricing with Heterogeneous Consumers and Limited Participation: Empirical Evidence," CRSP working papers 505, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  16. Kjetil Storesletten & Chris Telmer & Amir Yaron, . "Asset pricing with idiosyncratic risk and overlapping generations," GSIA Working Papers 226, Carnegie Mellon University, Tepper School of Business.
  17. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  18. Altonji, Joseph G, 1986. "Intertemporal Substitution in Labor Supply: Evidence from Micro Data," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S176-S215, June.
  19. Hess, Gregory D. & Shin, Kwanho, 2000. "Risk sharing by households within and across regions and industries," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 533-560, June.
  20. V. V. Chari & Mikhail Golosov & Aleh Tsyvinski, 2003. "Business Start-ups, the Lock-in Effect, and Capital Gains Taxation," Levine's Working Paper Archive 506439000000000222, David K. Levine.
  21. Chintagunta, Pradeep & Kyriazidou, Ekaterini & Perktold, Josef, 2001. "Panel data analysis of household brand choices," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 111-153, July.
  22. Annette Vissing-Jorgensen, 2000. "Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures," Econometric Society World Congress 2000 Contributed Papers 1102, Econometric Society.
  23. K. J. Arrow, 1964. "The Role of Securities in the Optimal Allocation of Risk-bearing," Review of Economic Studies, Oxford University Press, vol. 31(2), pages 91-96.
  24. Bo E. Honore & Arthur Lewbel, 1998. "Semiparametric Binary Choice Panel Data Models without Strictly Exogeneous Regressors," Boston College Working Papers in Economics 455, Boston College Department of Economics, revised 22 Sep 2001.
  25. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  26. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  27. Masao Ogaki & Qiang Zhang, 2000. "Decreasing Relative Risk Aversion and Tests of Risk Sharing," Econometric Society World Congress 2000 Contributed Papers 1588, Econometric Society.
  28. Sumru Altug & Robert Miller, . "Household Choices in Equilibrium," University of Chicago - Population Research Center 87-8, Chicago - Population Research Center.
  29. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, 01.
  30. Luigi Guiso & Michael Haliassos & Tullio Jappelli, 2002. "Household Stockholding in Europe: Where Do We Stand and Where Do We Go?," University of Cyprus Working Papers in Economics 0209, University of Cyprus Department of Economics.
  31. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  32. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
  33. Ana Castaneda & Javier Diaz-Gimenez & Jose-Victor Rios-Rull, 2003. "Accounting for the U.S. Earnings and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 818-857, August.
  34. Ethan Ligon, 1998. "Risk Sharing and Information in Village Economies," Review of Economic Studies, Oxford University Press, vol. 65(4), pages 847-864.
  35. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
  36. Himmelberg, Charles P. & Hubbard, R. Glenn & Love, Inessa, 2002. "Investor protection, ownership, and the cost of capital," Policy Research Working Paper Series 2834, The World Bank.
  37. Nelson, J.A., 1993. "On Testing for Full Insurance Using Consumer Expenditures Survey Data," Papers 93-02, California Davis - Institute of Governmental Affairs.
  38. Christopher Udry, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 495-526.
  39. Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January.
  40. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  41. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
  42. Kris Jacobs, 1999. "Incomplete Markets and Security Prices: Do Asset-Pricing Puzzles Result from Aggregation Problems?," Journal of Finance, American Finance Association, vol. 54(1), pages 123-163, 02.
  43. Ekaterini Kyriazidou, 2001. "Estimation of Dynamic Panel Data Sample Selection Models," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 543-572.
  44. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  45. Browning, Martin & Meghir, Costas, 1991. "The Effects of Male and Female Labor Supply on Commodity Demands," Econometrica, Econometric Society, vol. 59(4), pages 925-51, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:roc:rocher:490. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard DiSalvo)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.