Essays on Limited Asset Market Participation

The financial theory in economics predicts that all households should hold some stocks as long as the equity premium is positive. However, empirical research documents huge non - participation in the US stock market - which is a well - known phenomenon of limited asset market participation. This dissertation provides more insight into this phenomenon in two dimensions using a limited participation model. The first chapter investigates the effects of economic stabilization on agents who differ in asset market participation, and the second chapter examines their behavior of consumption and labor supply. The first chapter presents a welfare cost analysis of stockholders and of non - stockholders using the limited participation model that incorporates preference heterogeneity. Unlike previous studies that measured welfare gains resulting from the elimination all aggregate fluctuations in an economy, we calculate welfare gains resulting from the removal of only some of aggregate fluctuations. This approach allows us to measure marginal welfare gains which accrue from further reduction in aggregate fluctuations. We find that stockholders experience welfare losses from reducing aggregate risks, while non - stockholders have some welfare gains. We also find that, for both groups, marginal welfare effects resulting from reductions of aggregate fluctuations decrease. The second chapter presents a study of consumption and labor choice for stockii holders and non - stockholders using the limited participation model which incorporate a constant elasticity of substitution (CES) preference. In the US data, stockholders' consumption is relatively more volatile, while their labor is relatively less volatile than non - stockholders'; we use the model to attempt to explain this phenomenon. When it is calibrated to replicate these features observed in data, we find that the model can predict most aspects of business cycles and asset prices with a fair degree of accuracy. In addition, we find that the model can predict labor fluctuations more accurately when the elasticity of substitution between consumption and leisure is smaller than one for stockholders and greater than one for non - stockholders.

Note: Abstract extracted from PDF file via OCR