Dynamic Stock Market Participation of Households

This paper develops and estimates a dynamic model of stock market participation, where consumers’ decisions regarding stock market participation are influenced by participation costs. The practical significance of the participation costs is considered as being a channel through which financial education programs can affect consumers’ investment decisions. Using household data from the Panel Study of Income Dynamics, I estimate the magnitude of the participation cost, allowing for individual heterogeneity in it. The results show the average stock market articipation cost is about 5% of labor income; however, it varies substantially over consumers’ life. The model successfully predicts the level of the observed articipation rate and the increasing pattern of stock market participation over the consumers’ life cycle.Portfolio Choice, Stock Market Participation, Dynamic Models, Discrete Choice Models, Panel Data

Heterogenous intertemporal elasticity of substitution and relative risk aversion: estimation of optimal consumption choice with habit formation and measurement errors

This paper investigates the existence and degree of variation across house holds and over time in the intertemporal elasticity of substitution (IES) and the coefficient of relative risk aversion (RRA) that is generated by habit forming preferences. To do so, we develop a new nonlinear GMM estimator to investigate the presence of habit formation in household consumption using data from the Panel Study of Income Dynamics. Our method accounts for classical measurement errors in consumption without parametric assumptions on the distribution of measurement errors. The estimation results support habit formation in food consumption. Using these estimates, we develop bounds for the expectation of the implied heterogenous intertemporal elasticity of substitution and relative risk aversion that account for measurement errors and compute asymptotically valid confidence intervals on these bounds. We find that these parameters display significant variation across households and over time.Nonlinear models; Classical measurement errors; Habit formation; Intertemporal elasticity of substitution; Relative risk aversion

Interest-Only Mortgages and Consumption Growth: Evidence from a Mortgage Market Reform

We use detailed household-level data from Denmark to analyze how the introduction of interest-only mortgages affected consumption expenditure and borrowing. Four years after the reform interest-only mortgages constituted 40 percent of outstanding mortgage debt. Using an ex-ante measure of exposure motivated by financial constraints, we show households who are more likely to use an IO mortgage, increased consumption substantially following the reform. The increase in consumption is driven by borrowing at the time of refinancing and by borrowers with lower pre-reform leverage ratios. Our results show changes in the mortgage contract can have large impacts on consumption expenditure

Essays on Structural Modeling of Life Cycle Behavior

In the economic literature there are divergences on a number ofissues between the results obtained with macro- and micro-basedmodels. Habit formation in consumption is one example of suchdisagreement. Another example is the discrepancy between thetheoretical prediction that all investors should participate instock markets if the equity premium is positive, and empiricalevidence that a substantial fraction of individual consumers donot invest in stock markets. A primary goal of my thesis is to trynarrowing the gap between the results in these two literatures,looking at the problem from the prospective of households. Chapter1 develops a nonlinear GMM estimator to investigate the presenceof habit formation in household consumption. The estimationresults support the existence of habit formation in foodconsumption. Next, I exploit the property of habit formationpreferences to generates the time- and individual-varying RelativeRisk Aversion and Intertemporal Elasticity of Substitution toanalyze the degree of heterogeneity in these coefficients. I findthat these parameters display significant variation acrossindividuals and over time. In Chapter 2 I develop a dynamicstructural model of stock market participation and portfoliochoice to investigate whether financial education programs canaffect consumers' choices and increase participation in financialmarkets. I estimate the model, where the consumers' decisionsregarding stock market participation are influenced byparticipation costs. The results provide evidence that theparticipation cost is substantial. The model estimates are thenused to conduct simulation exercises to evaluate the effect offinancial education programs

Dynamic Stock Market Participation of Households

This paper develops and estimates a dynamic model of stock market participation, where consumers’ decisions regarding stock market participation are influenced by participation costs. The practical significance of the participation costs is considered as being a channel through which financial education programs can affect consumers’ investment decisions. Using household data from the Panel Study of Income Dynamics, I estimate the magnitude of the participation cost, allowing for individual heterogeneity in it. The results show the average stock market articipation cost is about 5% of labor income; however, it varies substantially over consumers’ life. The model successfully predicts the level of the observed articipation rate and the increasing pattern of stock market participation over the consumers’ life cycle

Intratemporal Nonseparability between Housing and Nondurable Consumption: Evidence from Reinvestment in Housing Stock

Using the data on maintenance expenditures and self-assessed house value, I separate the measure of individual housing stock and house prices, and use these data for testing whether nondurable consumption and housing are characterized by intratemporal nonseparability in households' preferences. I find evidence in favor of intratemporal dependence between total nondurable consumption and housing. I reach a similar conclusion for some separate consumption categories, such as food and utility services. My findings also indicate households are more willing to substitute housing and nondurable consumption within a period than to substitute composite consumption bundles over different time periods

Evidence from Reinvestment in Housing Stock

Using the data on maintenance expenditures and self-assessed house value, I separate the measure of individual housing stock and house prices, and use these data for testing whether nondurable consumption and housing are characterized by intratemporal nonseparability in households’ preferences. I find evidence in favor of intratemporal dependence between total nondurable consumption and housing. I reach a similar conclusion for some separate con-sumption categories, such as food and utility services. My findings also indicate households are more willing to substitute housing and nondurable consumption within a period than to substitute composite consumption bundles over different time periods

Finite Gaussian Mixture Approximations to Analytically Intractable Density Kernels

The objective of the paper is that of constructing finite Gaussian mixture approximations to analytically intractable density kernels. The proposed method is adaptive in that terms are added one at the time and the mixture is fully re-optimized at each step using a distance measure that approximates the corresponding importance sampling variance. All functions of interest are evaluated under Gaussian quadrature rules. Examples include a sequential (filtering) evaluation of the likelihood function of a stochastic volatility model where all relevant densities (filtering, predictive and likelihood) are closely approximated by mixtures