KOREA CAPITAL MARKET INSTITUTE

We ask two questions in this research regarding Korean capital market. The first: Why don't households participate more in the stock or fund market given the excess return? This presents a type of equity premium puzzle. The second: What are the principal causes of the decline in households stock or fund market participation after the global financial crisis in 2008? We conduct empirical studies with panel data from the National Survey of Tax and Benefit (NaSTaB) to search for answers to these questions.

For the first question, we use a panel probit model to identify the determinants of stock or fund market participation. The empirical results show that higher income and higher level of financial assets of households are more likely to affect participation in the stock and fund market. The education level of the household is another major factor. Home ownership, however, is not a critical factor that determines participation. We find that Korea's case is similar to those in advanced countries, more specifically, there is financial market friction as well as background risk of households.

The panel data analysis shows substantial changes in household characteristics before and after the global financial crisis of 2008. Many households turned to self-employment after their retirement in that period, and they were most likely to invest their own financial assets in their new business. Consequently, they had less room to invest in risky assets such as equity and funds, and their income stability fell. Additionally, the risk exposure was high in the rental housing market in that period. We find these factors to be the main causes of the household participation decline after the global financial crisis.

There are several policy implications from the empirical analysis. The most important thing is that the stock or fund market should give stable excess return to households. Some effective tools to generate stable excess returns in the equity and fund markets are policies that encourage higher dividends, incentives for introducing financial products with tax benefits, and a wider offering of mid-risk, mid-return products. Reducing the implicit cost from information asymmetry is also important. In addition, the government and the asset management industry have to recover investors' shocked confidence in both markets from several financial crises.