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: G11 D12 E21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac and nep-upt
Date: 2006-02-01
View list of references View citations in EconPapers

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

Related works:
Working Paper: The forgone gains of incomplete portfolios (2007)
Journal Article: The Forgone Gains of Incomplete Portfolios (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:sef:csefwp:156

Access Statistics for this paper

More papers in CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy
Contact information at EDIRC.
Series data maintained by Lia Ambrosio ().