The Forgone Gains of Incomplete Portfolios
Review of Financial Studies
2007
This article proposes a test for the cost-based explanation of nonparticipation, by estimating a lower bound to the forgone gains of incomplete portfolios; these are in turn a lower bound to the costs that could rationalize nonparticipation in financial markets: high bounds would imply implausibly high costs. Assuming isoelastic utility and a relative risk aversion of three or less, for the stock market I estimate an average lower bound of between 0.7 and 3.3 percent of consumption. Since total annual (observable plus unobservable) participation costs are likely to exceed these bounds, the cost-based explanation is not rejected by this test. , Oxford University Press.
- DOI
- 10.1093/rfs/hhm022
- Volume
- 20 (5)
- Pages
- 1623-1646
- Language
- en
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