The forgone gains of incomplete portfolios

Monica Paiella

No 625, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper proposes a test for the cost-based explanation of non-participation, by estimating a lower bound to the forgone gains of incomplete portfolios; these are in turn a lower bound to the costs that could rationalize non-participation in financial markets: high bounds would imply implausibly high costs. Assuming isoelastic utility and a relative risk aversion of 3 or less, for the stock market I estimate an average lower bound of between 0.7 and 3.3 percent of consumption. Since total annual (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 costs of participation (search for similar items in EconPapers)
JEL-codes: D12 E21 G11 (search for similar items in EconPapers)
Date: 2007-04
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Citations: View citations in EconPapers (19)

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Related works:
Journal Article: The Forgone Gains of Incomplete Portfolios (2007)
Working Paper: The Foregone Gains of Incomplete Portfolios (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_625_07

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