Optimal portfolio choice with stock market entry costs and human capital investments: A developing country model

This study estimates that stock market entry costs of around 31–35% of income can explain the observed level of non-participation in developing countries. Employing a two-generation, multi-period model with income risk, borrowing constraints and flexible human capital investment options in the offspring, the study numerically computes the possible improvements in consumption and human capital if households participate in the financial markets. The study extends the portfolio choice literature by endogenizing human capital investments and compares the optimal portfolio choice graph of a parent with that of a single worker. Results show that a parent’s portfolio should contain more bonds when educational investments are inflexible and more stocks when they are flexible. Lower asset levels of a parent also tend to increase stock holding percentage.