Does it pay to invest? The personal equity risk premium and stock market participation

Yulia Merkoulova and Chris Veld

Journal of Banking & Finance, 2022, vol. 136, issue C

Abstract: Individuals’ stock market participation depends on the risk-return trade-off they expect to achieve. We find that the expected economic benefits of investing are highly heterogeneous. We define the personal equity risk premium (PERP) as the difference between an individual's expectation of returns and personal opportunity cost of capital. Higher PERP is associated with greater stock market participation. Our results hold after we control for known factors, such as financial literacy, trust, and loss aversion, and are stronger for the level of stock investment. Disentangling PERP shows that both components help explain both stock market participation and the level of participation.

Keywords: Stock market participation; Equity risk premium; Financial literacy; Trust; Loss aversion (search for similar items in EconPapers)
JEL-codes: D14 G11 G41 G51 G53 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:136:y:2022:i:c:s0378426621001795

DOI: 10.1016/j.jbankfin.2021.106220

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