Trusting the Stock Market

Luigi Guiso (), Paola Sapienza () and Luigi Zingales

No 5288, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross-country data.

Keywords: portfolio choice; stock market participation; trust (search for similar items in EconPapers)
JEL-codes: D1 D8 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-fmk
Date: 2005-10
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Related works:
Working Paper: Trusting the Stock Market (2005)
Working Paper: Trusting the Stock Market (2005)
Journal Article: Trusting the Stock Market (2008)
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