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Savings selectivity bias, subjective expectations and stock market participation

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  • Yosef Bonaparte
  • Frank Fabozzi

Abstract

Studies of household stock market participation report low participation rates. The explanations cited are that the fixed costs associated with participation and high risk aversion discourage households from buying stocks. However, the low participation rate findings are unchallenged. We argue that because prior studies fail to recognize that not all households save, there exists a selection bias when estimating the household participation rate. After correcting for this selection bias, as well as accounting for the influence of subjective expectations on market participation, we show that the unconditional probability of participating in the stock market would increase twofold.

Suggested Citation

  • Yosef Bonaparte & Frank Fabozzi, 2011. "Savings selectivity bias, subjective expectations and stock market participation," Applied Financial Economics, Taylor & Francis Journals, vol. 21(3), pages 119-130.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:3:p:119-130
    DOI: 10.1080/09603107.2010.526579
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    References listed on IDEAS

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    1. Daniel S. Hamermesh & Stephen G. Donald, 2004. "The Effect of College Curriculum on Earnings: Accounting for Non-Ignorable Non-Response Bias," NBER Working Papers 10809, National Bureau of Economic Research, Inc.
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