Autore: Paiella, Monica
Titolo: Limited Financial Market Partecipation: A Transaction Cost-Based Explanation
Periodico: Banca d'Italia. Temi di discussione
Anno: 2001 - Volume: 8 - Fascicolo: 415 - Pagina iniziale: 1

This paper focuses on the issue of limited financial market participation and etermines a lower bound on the level of fixed nsaction costs that are required to reconcile bserved portfolio choices with asset returns within an isoelastic utility framework. The bound is determined from the set of conditions that ensure the optimality of consumption behavior by financial market nonparticipants. It represents the lowest possible cost rationalizing observed non-participation choices by providing a measure of the forgone utility gains from participation for observed non-participants. Such gains are related both to the magnitude of financial market returns and to the opportunity of smoothing consumption, with the benefits of the former decreasing in the degree of relative risk aversion and those of the latter increasing in it. Using the US Consumer Expenditure Survey, I find that a yearly cost of at least $70 is needed to rationalize non-participation for a consumer with log utility and who can trade in the S&P500 CI. This lower bound declines rapidly in risk aversion for levels of risk aversion up to two/three; for higher values, it levels off. A yearly cost of at least $31 is needed to rationalize non-participation for a consumer with log utility and who can trade in US Treasury Bills. This lower bound rises steadily in risk aversion.


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Testo completo: http://www.bancaditalia.it/pubblicazioni/temidi/td415/sintesi415.pdf

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