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Does it pay to invest? The personal equity risk premium and stock market participation
General Information
Title
Does it pay to invest? The personal equity risk premium and stock market participation
Author
Yulia Merkoulova and Chris Veld
Publication Type
Journal paper
Outlet
Journal of Banking and Finance
Year
2021
Abstract
Individuals’ stock market participation depends on the risk-return trade-off they expect to achieve. We find that the expected economic benefits of investing are highly heterogeneous. We define the personal equity risk premium (PERP) as the difference between an individual's expectation of returns and personal opportunity cost of capital. Higher PERP is associated with greater stock market participation. Our results hold after we control for known factors, such as financial literacy, trust, and loss aversion, and are stronger for the level of stock investment. Disentangling PERP shows that both components help explain both stock market participation and the level of participation.