DP15370 Income Risk and Stock Market Entry/Exit Decisions

Author(s): Yosef Bonaparte, George Korniotis, Alok Kumar
Publication Date: October 2020
Date Revised: April 2021
Keyword(s): non-retirement accounts, ownership turnover, PSID, SCF, Trading Costs
JEL(s): D14, G11, G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15370

This study examines the stock market entry and exit decisions of U.S. households. We find that a significant portion of households enters or exits from their non-retirement investment accounts biennially. Empirical evidence indicate that income risk affects equity ownership turnover. A portfolio choice model with an income process extracted from survey data shows that idiosyncratic income shocks are more important for dynamic equity ownership decisions than aggregate stock market risk. The model yields realistic estimates for the coefficient of relative risk aversion (= 3.09) and the discount factor (= 0.97).