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Do Stockholders Share Risk More Effectively Than Non- stockholders?

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  • Fatih Guvenen

    (University of Rochester)

Abstract

This paper analyzes the extent of risk-sharing among stockholders and among nonstockholders. Wealthy households play a crucial role in many economic problems due to the substantial concentration of asset holdings in the U.S. data. Hence, to evaluate the empirical importance of market incompleteness, it is essential to determine if idiosyncratic shocks are important for the wealthy, who have access to better insurance opportunities, but also face different risks, than the average household. We study a model where each period households decide whether to participate in the stock market by paying a fixed cost. Due to this endogenous entry decision, the testable implications of perfect risk- sharing take the form of a sample selection model, which we estimate and test using a semi-parametric GMM estimator proposed by Kyriazidou (2001). Using data from PSID we strongly reject perfect risk-sharing among stockholders, but perhaps surprisingly, do not find evidence against it among non-stockholders. These results appear to be robust to several extensions we considered. These findings indicate that market incompleteness may be more important for the wealthy, and suggest further focus on risk factors that primarily affect this group, such as entrepreneurial income risk.

Suggested Citation

  • Fatih Guvenen, 2005. "Do Stockholders Share Risk More Effectively Than Non- stockholders?," Macroeconomics 0508006, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0508006
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Christian Friedrich, 2015. "Does Financial Integration Increase Welfare? Evidence from International Household-Level Data," Staff Working Papers 15-4, Bank of Canada.
    2. Khorunzhina, Natalia, 2013. "Structural estimation of stock market participation costs," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2928-2942.
    3. Fatih Guvenen, 2011. "Macroeconomics with hetereogeneity : a practical guide," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 255-326.
    4. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2016. "Heterogeneity and Persistence in Returns to Wealth," EIEF Working Papers Series 1615, Einaudi Institute for Economics and Finance (EIEF), revised Nov 2016.
    5. Gervais, Martin & Klein, Paul, 2009. "Measuring consumption smoothing in CEX data," Discussion Paper Series In Economics And Econometrics 0906, Economics Division, School of Social Sciences, University of Southampton.
    6. Santos Monteiro, Paulo, 2008. "Testing Full Consumption Insurance in the Frequency Domain," The Warwick Economics Research Paper Series (TWERPS) 874, University of Warwick, Department of Economics.
    7. Monteiro, Paulo Santos, 2008. "Testing Full Consumption Insurance in the Frequency Domain," Economic Research Papers 269910, University of Warwick - Department of Economics.
    8. Lixin Tang, 2014. "Top Income Inequality, Aggregate Saving and the Gains from Trade," 2014 Papers pta581, Job Market Papers.
    9. Giacomo De Giorgi & Luca Gambetti, 2012. "Consumption Heterogeneity over the Business Cycle," Working Papers 646, Barcelona Graduate School of Economics.

    More about this item

    Keywords

    Perfect risk-sharing; incomplete markets; semiparametric estimation; Generalized Method of Moments; limited stock market participation.;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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