Household Debt and Stock Market Participation

Abstract

This paper examines how debt relates to a household’s stock market participation and risky asset allocation decisions. Debt is defined as total debt levels as well as the proportion of debt to assets and used in Logit and OLS specifications to explain participation and the risky share. In addition, both debt definitions are broken down into separate debt sub-components. Overall, the findings paint a mixed picture, where debt levels appear to be positively related to participation and negatively related to asset allocation, while debt as a share of assets is negatively (positively) associated with participation (risky asset allocation), over and above the standard drivers documented in the literature. This study contributes by combining the debt and asset sides of a household’s balance sheet, using various debt components (both separately and in conjunction) and employing various variable definitions to substantiate the mixed findings in the literature.