The Costs and Beliefs Implied by Direct Stock Ownership

Daniel Barth ()
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Daniel Barth: Office of Financial Research, U.S. Department of Treasury, Washington, DC 20005

Management Science, 2018, vol. 64, issue 11, 5263-5288

Abstract: This paper develops and estimates an economic model of the costs and beliefs required to rationalize household direct stock ownership. In the model, investors believe they can learn information about individual stock returns through costly research. The model identifies the distributions of both research costs and beliefs about the predictability of individual stock returns. Identification depends only on households’ wealth and portfolio choices. The model also provides a novel explanation for many empirical features of household portfolios. Parameter estimates suggest that most households have modest beliefs about the benefits of individual stock research, although a minority must expect extraordinary returns.

Keywords: household beliefs; research costs; underdiversification; direct stock ownership (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:11:p:5263-5288

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