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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Stock Market Investment: The Role of Human Capital
Kartik B. Athreya
Felicia Ionescu
Urvi Neelakantan
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.


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Kartik B. Athreya & Felicia Ionescu & Urvi Neelakantan, Stock Market Investment: The Role of Human Capital, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2015-65, 14 Jun 2015, revised 20 Jun 2016.
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Keywords: Human capital investment; Life-cycle; Financial portfolios
DOI: 10.17016/FEDS.2015.065r1
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