The Forgone Gains of Incomplete Portfolios |
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Authors: | Paiella Monica |
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Institution: | Bank of Italy, Research Department, Via Nazionale 91, Rome 00184, Italy |
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Abstract: | This article proposes a test for the cost-based explanationof nonparticipation, by estimating a lower bound to the forgonegains of incomplete portfolios; these are in turn a lower boundto the costs that could rationalize nonparticipation in financialmarkets: high bounds would imply implausibly high costs. Assumingisoelastic utility and a relative risk aversion of three orless, for the stock market I estimate an average lower boundof between 0.7 and 3.3 percent of consumption. Since total annual(observable plus unobservable) participation costs are likelyto exceed these bounds, the cost-based explanation is not rejectedby this test. |
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