Do Stockholders Share Risk More Effectively Than Non- stockholders?

Fatih Guvenen

Macroeconomics from University Library of Munich, Germany

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.

Keywords: Perfect risk-sharing; incomplete markets; semiparametric estimation; Generalized Method of Moments; limited stock market participation. (search for similar items in EconPapers)
JEL-codes: C33 E52 G11 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2005-08-06
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-mac
Note: Type of Document - pdf; pages: 28
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https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0508/0508006.pdf (application/pdf)

Related works:
Journal Article: Do Stockholders Share Risk More Effectively than Nonstockholders? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0508006

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