DP7239 Portfolio Inertia and Stock Market Fluctuations

Author(s): Yannis Bilias, Dimitris Georgarakos, Michael Haliassos
Publication Date: March 2009
Keyword(s): household finance, portfolio inertia, stock trading, Stockholding
JEL(s): E21, G11
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7239

Existing studies of household stock trading using administrative data offer conflicting results: discount brokerage accounts exhibit excessive trading, while retirement accounts show inactivity. This paper uses population-wide data from PSID and SCF to examine the overall extent of household portfolio inertia in participation and trading and its link to household characteristics and stock market movements. We document considerable portfolio inertia, linked to characteristics (e.g., low education or limited resources), but hardly to index movements. The downswing seems to have encouraged staying out, rather than getting out of the market. We find important differences in trading patterns of the small minority with brokerage accounts relative to the population; and small fractions of owners? wealth in those accounts. Our findings strengthen the case for default options in retirement accounts and for funds with built-in trading provisions. While households did not overreact to the downswing through massive sales or exits, this seems more a manifestation of widespread inertia than of optimal response to stock market fluctuations.