Investing at home and abroad: different costs, different people?

We investigate US households’ direct investment in stocks, bonds and liquid accounts and their foreign counterparts, in order to identify the different participation hurdles affecting asset investment domestically and overseas. To this end, we estimate a trivariate probit model with three further selection equations that allows correlations among unobservables of all possible asset choices. Our results point to the existence of a second hurdle that stock owners need to overcome in order to invest in foreign stocks. Among stockholders, we show that economic resources, willingness to assume greater financial risks, shopping around for the best investment opportunities all increase the probability to invest in foreign stocks. Furthermore, we find that households who seek financial advice from relatives, friends and work contacts are less likely to invest in foreign stocks. This result corroborates the conjecture by Hong et al. (2004) that social interactions should discourage investment in foreign stocks, given their limited popularity. On the other hand, we find little evidence for additional pecuniary or informational costs associated with investment in foreign bonds and liquid accounts. Finally, we show that ignoring correlations of unobservables across different asset choices can lead to very misleading results

Investing at Home and Abroad: Different Costs, Different People?

We investigate US households’ direct investment in stocks, bonds and liquid accounts and their foreign counterparts, in order to identify the different participation hurdles affecting asset investment domestically and overseas. To this end, we estimate a trivariate probit model with three further selection equations that allows correlations among unobservables of all possible asset choices. Our results point to the existence of a second hurdle that stock owners need to overcome in order to invest in foreign stocks. On the other hand, we find little evidence for additional pecuniary or informational costs associated with investment in foreign bonds and liquid accounts.Foreign assets, household finance, stockholding, multivariate probit, simulated maximum likelihood, selection.

Cognitive abilities and portfolio choice

We study the relation between cognitive abilities and stockholding using the recent Survey of Health, Ageing and Retirement in Europe (SHARE), which has detailed data on wealth and portfolio composition of individuals aged 50+ in 11 European countries and three indicators of cognitive abilities: mathematical, verbal fluency, and recall skills. We find that the propensity to invest in stocks is strongly associated with cognitive abilities, for both direct stock market participation and indirect participation through mutual funds and retirement accounts. Since the decision to invest in less information-intensive assets (such as bonds) is less strongly related to cognitive abilities, we conclude that the association between cognitive abilities and stockholding is driven by information constraints, rather than by features of preferences or psychological traits

Household economic decisions under the shadow of terrorism : [This Version: January 4, 2009]

We investigate, using the 2002 US Health and Retirement Study, the factors influencing individuals’ insecurity and expectations about terrorism, and study the effects these last have on households’ portfolio choices and spending patterns. We find that females, the religiously devout, those equipped with a better memory, the less educated, and those living close to where the events of September 2001 took place worry a lot about their safety. In addition, fear of terrorism discourages households from investing in stocks, mostly through the high levels of insecurity felt by females. Insecurity due to terrorism also makes single men less likely to own a business. Finally, we find evidence of expenditure shifting away from recreational activities that can potentially leave one exposed to a terrorist attack and towards goods that might help one cope with the consequences of terrorism materially (increased use of car and spending on the house) or psychologically (spending on personal care products by females in couples)

Stockholding: from participation to location and to participation spillovers

This paper provides a joint analysis of household stockholding participation, stock location among stockholding modes, and participation spillovers, using data from the US Survey of Consumer Finances. Our multivariate choice model matches observed participation rates, conditional and unconditional, and asset location patterns. Financial education and sophistication strongly affect direct stockholding and mutual fund participation, while social interactions affect stockholding through retirement accounts only. Household characteristics influence stockholding through retirement accounts conditional on owning retirement accounts, unlike what happens with stockholding through mutual funds. Although stockholding is more common among retirement account owners, this fact is mainly due to their characteristics that led them to buy retirement accounts in the first place rather than to any informational advantages gained through retirement account ownership itself. Finally, our results suggest that, taking stockholding as given, stock location is not arbitrary but crucially depends on investor characteristics. JEL Classification: G11, E21, D14, C3

Economic integration and mature portfolios

This paper documents and studies sources of international differences in participation and holdings in stocks, private businesses, and homes among households aged 50+ in the US, England, and eleven continental European countries, using new internationally comparable, household-level data. With greater integration of asset and labor markets and policies, households of given characteristics should be holding more similar portfolios for old age. We decompose observed differences across the Atlantic, within the US, and within Europe into those arising from differences: a) in the distribution of characteristics and b) in the influence of given characteristics. We find that US households are generally more likely to own these assets than their European counterparts. However, European asset owners tend to hold smaller real, PPP-adjusted amounts in stocks and larger in private businesses and primary residence than US owners at comparable points in the distribution of holdings, even controlling for differences in configuration of characteristics. Differences in characteristics often play minimal or no role. Differences in market conditions are much more pronounced among European countries than among US regions, suggesting significant potential for further integration

Wealth and Portfolio Composition

This paper provides basic statistics on household total wealth, financial assets, and financial assets composition of the elderly as key indicators of the well-being and quality of life of the elderly. Median total wealth varies much less than median financial wealth across countries. As for financial asset ownership, the chapter focuses on bonds, stocks, mutual funds and life-insurance policies and documents the polarization between Nordic and Mediterranean countries. The elderly tend to invest more in stocks and to have a more diversified portfolio in Northern and Central Europe than in the South. The chapter also offers insights about the relation between financial risk exposure and age and the time that the elderly spend managing their financial assets.

Stockholding: From Participation to Location and to Participation Spillovers

This paper provides a joint analysis of household stockholding participation, stock location among stockholding modes, and participation spillovers, using data from the US Survey of Consumer Finances. Our multivariate choice model matches observed participation rates, conditional and unconditional, and asset location patterns. Financial education and sophistication strongly affect direct stockholding and mutual fund participation, while social interactions affect stockholding through retirement accounts only. Household characteristics influence stockholding through retirement accounts conditional on owning retirement accounts, unlike what happens with stockholding through mutual funds. Although stockholding is more common among retirement account owners, this fact is mainly due to their characteristics that led them to buy retirement accounts in the first place rather than to any informational advantages gained through retirement account ownership itself. Finally, our results suggest that, taking stockholding as given, stock location is not arbitrary but crucially depends on investor characteristics.Stockholding, Asset Location, Retirement Accounts, Household Finance, Multivariate Probit, Simulated Maximum Likelihood.

Expected Bequests and Current Wealth of Older Households

We use the subjective probabilities of bequests to be given in the future and current asset holdings, as reported in three household surveys (HRS, ELSA, and SHARE) covering thirteen countries, in order to assess whether, and to what extent, households plan to decumulate assets in old age. We model intended bequests as a function of household demographic and economic characteristics, and estimate their expected value using quasi-maximum likelihood methods. By comparing the current wealth holdings with the expected intended bequests we compute the pattern of future saving by households, and assess its cross-country variability with respect to housing wealth.