The Dynamics of Stock Market Participation (with Sigurd Mølster Galaasen)

We document novel facts on the exit and re-entry margins of stock market participation by retail investors. Using detailed administrative data containing wealth information for every Norwegian resident from 1993 to 2018, we find that many households leave the stock market within just 1-2 years after entry. Such behavior is more prominent for low income, wealth and education groups. We also show that the longer households have been participating for, the less likely they are to exit. On the re-entry margin, over 35% of exiters eventually return to the stock market, often just 1 year later. To produce such patterns, the workhorse portfolio choice model requires very high per-period participation costs. We therefore propose a theory of experience effects, whereby agents form beliefs over the equity premium based on their realized returns. This model can explain the short-term dynamics in stock market participation without requiring high participation costs.

 Download the paper

Publications

Parental beliefs about returns to child health investments (with Pietro Biroli, Teodora Boneva and Christopher Rauh), Journal of Econometrics, 231(1): 33-57, 2022.
Childhood obesity has adverse health and productivity consequences and it poses negative externalities to health services. Its increase in recent decades can be traced back to unhealthy habits acquired during childhood. We investigate the role of parental beliefs by eliciting beliefs about the returns to a recommended-calorie diet and regular exercise using hypothetical investment scenarios. We show that perceived returns are predictive of health investments and outcomes, and that less educated parents perceive the returns to health investments to be lower. Our descriptive evidence suggests that beliefs contribute to the socioeconomic inequality in health outcomes and the intergenerational transmission of obesity.

Working papers

Credit, capital and crises: a GDP-at-Risk approach (with David Aikman, Jonathan Bridges, Cian O'Neill and Sinem Hacioğlu Hoke), CEPR Discussion Papers No. 15864, 2021.
Using quantile regressions applied to a panel dataset of 16 advanced economies, we examine how downside risk to growth over the medium term is affected by a set of macroprudential indicators. We find that credit and property price booms, and wide current account deficits increase downside risks 3 to 5 years ahead. However, such downside risks can be partially mitigated by increasing the capital ratio of the banking system. We show that GDP-at-Risk, defined as the 5th quantile of the projected GDP growth distribution three years ahead, deteriorated in the US in the run-up to the Global Financial Crisis, driven by rapid growth in credit and house prices alongside a widening current account deficit. Our results suggest such indicators could provide useful information for the stance of macroprudential policy.

Work in progress

Do bank capital requirements affect lending? Evidence from Basel I - draft coming soon
How does financial regulation affect economic outcomes? By exploiting the implementation of Basel I - the first major macroprudential policy of its kind - in the US, this paper quantifies the impact of bank capital regulation on balance sheets and lending. Capital ratios do increase in response to tighter requirements. Banks achieve this by reducing the size of their balance sheet: a 1 percentage point increase in required ratios causes a 2.5% fall in total assets. This decline is concentrated in loans, particularly commercial & industrial and non-residential real estate loans, with residential mortgage lending remaining unaffected.

Placement Officer
Mark Schankerman

Supervisors/Advisors
Ethan Ilzetzki

References
Ethan Ilzetzki
Ben Moll
Ricardo Reis
Cameron Peng

Email
a.raja@lse.ac.uk

Office Address
Department of Economics
London School of Economics and Political Science
Houghton Street, London WC2A 2AE