Experience-based Learning, Stock Market Participation and Portfolio Choice

Abstract The stock market participation rate among homeowners is twice as high as among renters. This paper builds a life-cycle portfolio choice model with endogenous housing tenure choice. A stylized form of preference heterogeneity generates a substantial difference in participation rates. A majority of households have a large savings motive and choose to be homeowners and participate. A minority of households have a small savings motive and find it less worthwhile to participate. Fewer of these households become homeowners. Difference-in-difference regressions on panel data do not find evidence of a crowding-out effect of homeownership on participation, supporting the message that preference heterogeneity matters. Received January 25, 2017; editorial decision March 21, 2018 by Editor Wei Jiang. Authors have furnished an Online Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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Investment in financial literacy, social security, and portfolio choice

Journal of Pension Economics and Finance ◽

10.1017/s1474747214000377 ◽

2014 ◽

Vol 14 (4) ◽

pp. 369-411 ◽

Cited By ~ 27

Author(s):

TULLIO JAPPELLI ◽

MARIO PADULA

Keyword(s):

Social Security ◽

Stock Market ◽

Portfolio Choice ◽

Financial Literacy ◽

Choice Model ◽

Later Life ◽

Optimal Investment ◽

Risky Asset ◽

Market Participation ◽

Stock Market Participation

AbstractWe present an intertemporal portfolio choice model where individuals invest in financial literacy, save, allocate their wealth between a safe and a risky asset, and receive a pension when they retire. Financial literacy affects the excess return from and cost of stock-market participation. Investors simultaneously choose how much to save, their portfolio allocation, and the optimal investment in financial literacy. The model implies that one should observe a positive correlation between stock-market participation (and risky asset share, conditional on participation) and financial literacy, and a negative correlation between the generosity of the social security system and financial literacy. The model also implies that financial literacy accumulated early in life is positively correlated with the individual's wealth and portfolio allocations in later life. Using microeconomic cross-country data, we find support for these predictions.

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