Stock Market Investment: The Role of Human Capital

Kartik Athreya, Felicia Ionescu () and Urvi Neelakantan

No 15-7, Working Paper from Federal Reserve Bank of Richmond

Abstract: Portfolio choice models counter factually predict (or advise) almost universal equity market participation and a high share for equity in wealth early in life. Empirically consistent predictions have proved elusive without participation costs, informational frictions, or non standard preferences. We demonstrate that once human capital investment is allowed, standard theory predicts portfolio choices much closer to those empirically observed. Two intuitive mechanisms are at work: For participation, human capital returns exceed financial asset returns for most young households and, as households age, this is reversed. For shares, risks to human capital limit the household's desire to hold wealth in risky financial equity.

JEL-codes: E21 G11 J24 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015-07-20
New Economics Papers: this item is included in nep-dge and nep-mac
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Working Paper: Stock Market Investment: The Role of Human Capital (2015)
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