The Foregone Gains of Incomplete Portfolios

Monica Paiella

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper estimates a lower bound to the foregone gains of incomplete portfolios, which are in turn a lower bound to the (unobserved) entry costs that could rationalize non-participation to financial markets. My estimates provide a heuristic test for the cost-based explanation of limited financial market participation: high estimates would imply implausibly high participation costs. Using the CEX and assuming isoelastic utility and a relative risk aversion of 3 or less, for the stock market I estimate an average lower bound ranging between 0.7 and 3.3 percent of consumption. Since annual total (observable plus unobservable) participation costs are likely to exceed these bounds, the cost-based explanation is not rejected by this test.

Keywords: intertemporal consumption model; financial market participation; household portfolio allocation; non-proportional cost of participation; near-rationality (search for similar items in EconPapers)
JEL-codes: D12 E21 G11 (search for similar items in EconPapers)
Date: 2006-02-01
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://www.csef.it/WP/wp156.pdf (application/pdf)

Related works:
Journal Article: The Forgone Gains of Incomplete Portfolios (2007)
Working Paper: The forgone gains of incomplete portfolios (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:156

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