Uncovering Asset Market Participation from Household Consumption and Income

Résumé En

We propose an asset pricing model featuring time-varying limited participation in both bond and stock markets and household heterogeneity. Households face idiosyncratic income risks but participate in financial markets with a certain probability that depends on their individual income and on asset market conditions. We employ a robust indirect inference estimation method to address the substantial heterogeneity in the data and to uncover individual asset market participation from individual consumption data and asset prices. The estimated model yields a limited participation that is consistent with Euler conditions and properly isolates three categories of households: stockholders, bondholders, and nonparticipants. The model very accurately reproduces the proportions of stockholders reported in the Survey of Consumer Finances over three-year intervals and provides a reasonable estimate of stock market participation costs. Finally, we use individual asset market participation to quantify propensities to consume for the three groups and to test whether the top decile of the households identified as stockholders by our estimated model are able to price characteristic-based stock portfolios. Our results are consistent with existing empirical evidence.