Stock market optimism and participation cost: a mean-variance estimation

Using Italian household data we jointly estimate the yearly cost of participating to the stock market and the cross sectional distribution of optimism about excess returns of stocks over bonds. Using mean-variance analysis we derive individual efficient portfolio allocation rules, as functions of amount invested and optimism, which provide a structural latent variable model. The observed heterogeneity in amounts invested and in risky portfolio allocations delivers identification: we estimate a yearly cost of participation of about 100 euro and a standard deviation of 30% in optimism