Three essays on household finance
Ampudia Fraile, Miguel
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This dissertation is composed of three papers that shed light on the stock-market participation puzzle. The first article studies different aspects of the participation of Spanish households in the stock market. I start by analyzing the determinants of stockholding in a reduced form setting, quantifying the importance of different socioeconomic variables on the decision to hold stock. This is complemented by a comparison with US stocking-holding behavior, especially that of highly sophisticated households who might be expected to participate fully in the market. The second article develops and estimates a full consumption and portfolio-choice life-cycle model to help explain the behavior uncovered in the first article. This model includes a fixed cost for participation in the stock and produces empirically sensible simulations of households' stock-holding patterns by age. It shows the powerful effect that the fixed cost has in explaining the non-participation issue. Moreover, using data from Spanish households I estimate this fixed cost. The third article, co-authored with Michael Ehrmann, breaks away from classic models and delves into the importance of considering more behavioural or psychological issues to explain this puzzle. In particular, we look at the effect of past macroeconomic experiences on the households' portfolio choice and risk-taking behaviour. We find that the average stock market return experienced by a household through its life time has a significant effect on its decision to hold stock. Moreover, disastrous events such as stock market crashes remain in people's minds and deter them from investing for a long period after the event happened.