How Household Risks Affect Stock Market Participation

Project: Research

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An important part in household portfolio choice is the choice of risk. As Kimball (1993) put it, the degree of background risk of households (risk that is not fully insurable and is beyond one's control) would affect their willingness to bear other risks. There are different sources of uncertainty that vary with age. Younger households at the working age mainly face income uncertainty, and older households face uncertainty about life span, medical expenses and health care needs. For working age households, social welfare program for workers like social security plans and occupation pension plans are crucial to diversify income uncertainty. For older households, health insurance is arguably one of the most important insurances for insuring against medical expenditure risk arising from negative health shock. This project aims at examining the central proposition that pensions/insurance plans affect income and medical expenses risk and hence households’ willingness to undertake financial risk. With rising medical cost, the risk from negative health shock on wealth can be significant. A study by Himmelstein et al. (2005) finds that half of all personal bankruptcy filings in five federal courts in 2001 were due to medical expenses. Our project contributes to the literature on stock market investment as, to our best knowledge, it is the first study to utilize a harmonized international household dataset to quantitative evaluate the relationship between household risks and financial investment behavior. The data is taken from Eurosystem Household Finance and Consumption Survey (HFCS) database of the European Central Bank (ECB) which contains individual and household data from 20 EU countries and covers detailed information of their asset holding, values of and contributions to different types of pensions and insurance plans, individuals and household demographics. In the empirical analysis, we adopt the endogenous-treatment model of Hu, Munkin and Trivedi (2015) to account for possible endogeneity in the decision to purchase supplemental insurance or contribution to voluntary pensions. The results from this project can shed light on how households' stock market participation rate and risky asset holdings can be affected by 1) insurance/pension system reforms that affect the completeness of the insurance/pension market and 2) the types and degrees of different faced by households' with different demographic characteristics. 


Project number9043088
Grant typeGRF
Effective start/end date1/01/21 → …