Trusting the Stock Market / Luigi Guiso, Paola Sapienza, Luigi Zingales.

By:

Guiso, Luigi

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w11648.Publication details: Cambridge, Mass. National Bureau of Economic Research 2005.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w11648 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w11645 Barriers To Entry /	nber w11646 Monetary-Fiscal Policy Interactions and the Price Level: Background and Beyond /	nber w11647 Employment Dynamics and Business Relocation: New Evidence from the National Establishment Time Series /	nber w11648 Trusting the Stock Market /	nber w11649 Entry and Competition in Local Hospital Markets /	nber w1165 The Equilibrium Approach to Labor Markets /	nber w11650 Heterogeneous Firms, Agglomeration and Economic Geography: Spatial Selection and Sorting /	Next

October 2005.

We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data.