Stock market optimism and participation cost: a mean-variance estimation

Monica Paiella and Andrea Tiseno

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: This paper estimates the costs of participating to the stock market, together with the cross sectional dispersion of stock market optimism. Our analysis is based on a mean-variance framework, when there is a riskless asset (cash), which makes the allocation of the investment in risky assets (stocks and bonds) independent on preferences. Within this framework, we derive “structural” decision rules for the composition of the risky asset portfolio to be e¢cient. These rules depend on the amount invested in the risky portfolio and on investors' optimism, which are the determinants of the stock market return expected by a household, when participation involves a …xed cost. Using these rules and the heterogeneity in risky assets holdings and in the degree of optimism, we identify both the fixed costs of stock investment This paper estimates the costs of participating to the stock market, together with the cross sectional dispersion of stock market optimism. Our analysis is based on a mean-variance framework, when there is a riskless asset (cash), which makes the allocation of the investment in risky assets (stocks and bonds) independent on preferences. Within this framework, we derive “structural” decision rules for the composition of the risky asset portfolio to be e¢cient. These rules depend on the amount invested in the risky portfolio and on investors' optimism, which are the determinants of the stock market return expected by a household, when participation involves a …xed cost. Using these rules and the heterogeneity in risky assets holdings and in the degree of optimism, we identify both the fixed costs of stock investment

Keywords: heterogeneous household portfolios; mean-variance frontier; participation cost; expectation error (search for similar items in EconPapers)
JEL-codes: D12 D14 G11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2005-05
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Related works:
Working Paper: Stock market optimism and participation cost: a mean-variance estimation (2006)
Working Paper: Stock market optimism and participation cost: a mean-variance estimation (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:dnbwpp:040

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