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Stockholding: Recent Lessons from Theory and Computations

  • Michael Haliassos

Household-level portfolio data show a tendency of the majority of households in each country to hold no stocks despite a historical expected-return premium on equity relative to riskless assets. This paper first explains why such a tendency constitutes a puzzle in economic theory (the "stockholding puzzle"). It discusses why simple popular notions regarding the source of non-participation (risk aversion, risky labor income, and borrowing constraints) are not confirmed by careful analysis of portfolio models and presents recent conclusions on what causes non-participation. Based on this, it revisits the popular view on non-participation and shows how it can be qualified to be consistent with lessons from economic theory. It also explains how this view can be extended to account for exits from the stock market and for limited diversification. Then, the paper describes three unsolved empirical puzzles concerning the share of stocks in portfolios of households that do participate in the stock market. It points to basic underlying mechanisms producing these theoretical results and discusses briefly possible future directions for research that may help resolve the puzzles. Finally, the paper draws lessons for practitioners interested in expanding the stockholder base.

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File URL: http://papers.econ.ucy.ac.cy/RePEc/papers/0206.pdf
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Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 0206.

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Length: 38 pages
Date of creation: May 2002
Date of revision:
Handle: RePEc:ucy:cypeua:0206
Contact details of provider: Web page: http://www.econ.ucy.ac.cy

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