Working Paper

Stock Market Investment: The Role of Human Capital

Abstract: Participation in the stock market is limited, especially early in life. By contrast, human capital investment is widespread, especially early in life. Returns to equity are constant across households, while returns to human capital vary. The contribution of this paper is to demonstrate that once human capital investment is allowed for and, critically, disciplined to match observed dispersion in earnings, an entirely standard model of portfolio choice delivers stock market participation rates consistent with the data over the entire life cycle. Moreover, we show that endogenizing human capital strongly alters the role of borrowing costs in limiting stock market participation.

Keywords: Human capital investment; Life-cycle; Financial portfolios;

JEL Classification: E21; G11; J24;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2016-06-20

Number: 2015-65