Financial Risk Propensity, Business Cycles and Perceived Risk Exposure

We analyse whether individual financial risk propensity changes over time with background financial conditions, as well as personal and subjective portfolio risk exposure. We elicit risk propensity from six different self-assessed facets collected in a long panel data set from the DNB Household Survey, annually covering the period 1995–2015. Risk propensity is generally higher during periods of economic growth and lower during periods of recession, but is untrended when elicited, using questions referring to safe investments. Our risk propensity measure is also higher following positive stock market returns or subjectively large risk exposure in own past investments.

[1]  G. Kézdi,et al.  STOCK MARKET CRASH AND EXPECTATIONS OF AMERICAN HOUSEHOLDS. , 2011, Journal of applied economics.

[2]  A. Bucciol,et al.  The shadow of the past: Financial risk taking and negative life events , 2015 .

[3]  Brad M. Barber,et al.  Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment , 1998 .

[4]  Terrance Odean,et al.  Learning to Be Overconfident , 1997 .

[5]  Ulrike Malmendier,et al.  Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking? , 2009 .

[6]  Markus K. Brunnermeier,et al.  Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation , 2005 .

[7]  Marno Verbeek,et al.  Non-response in panel data: The impact on estimates of a life cycle consumption function. , 1992 .

[8]  Michael Ehrmann,et al.  Macroeconomic Experiences and Risk Taking of Euro Area Households , 2014, SSRN Electronic Journal.

[9]  A. Bucciol,et al.  Household Portfolio Risk , 2013 .

[10]  Christopher K. Hsee,et al.  Risk as Feelings , 2001, Psychological bulletin.

[11]  Stochastic Frontier Model.  CONSISTENT ESTIMATION OF THE FIXED EFFECTS , 2011 .

[12]  Lawrence J. Christiano,et al.  HABIT PERSISTENCE AND ASSET RETURNS IN AN EXCHANGE ECONOMY , 1997, Macroeconomic Dynamics.

[13]  Paola Sapienza,et al.  Time Varying Risk Aversion , 2013, Journal of Financial Economics.

[14]  Markus K. Brunnermeier,et al.  Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Micro-Evidence on Individuals' Asset Allocation , 2008 .

[15]  J. Lerner,et al.  Fear, anger, and risk. , 2001, Journal of personality and social psychology.

[16]  Traci L. Mach,et al.  Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009 , 2011 .

[17]  Marc L. Ross,et al.  Individual Investor Perceptions and Behavior during the Financial Crisis , 2013 .

[18]  P. Noord,et al.  The Global Financial Crisis and its effects on the Netherlands , 2009 .

[19]  Raffaele Miniaci,et al.  Household Portfolios and Implicit Risk Preference , 2011, Review of Economics and Statistics.

[20]  M. Hurd,et al.  Stock Market Expectations of Dutch Households , 2009, Journal of applied econometrics.

[21]  A. Shleifer,et al.  Expectations of Returns and Expected Returns , 2013 .

[22]  N. Barberis.  Psychology and the Financial Crisis of 2007-2008 , 2011 .

[23]  J. Driscoll,et al.  Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data , 1998, Review of Economics and Statistics.

[24]  Alok Kumar,et al.  Do Behavioral Biases Adversely Affect the Macro-Economy? , 2008 .

[25]  A. Kapteyn,et al.  Subjective Measures of Risk Aversion, Fixed Costs, and Portfolio Choice , 2009 .

[26]  E. Weber,et al.  Who Takes Risks When and Why: Determinants of Changes in Investor Risk Taking , 2012 .

[27]  A. Hoffmann,et al.  How Return and Risk Experiences Shape Investor Beliefs and Preferences , 2015 .

[28]  Gene Amromin,et al.  From the Horse's Mouth: Economic Conditions and Investor Expectations of Risk and Return , 2014, Manag. Sci..

[29]  Brigitte C. Madrian,et al.  Reinforcement Learning and Savings Behavior , 2007, The Journal of finance.

[30]  Francesco Zanetti.  Housing and relative risk aversion , 2014 .

[31]  Eric T. Swanson.  Risk Aversion and the Labor Margin in Dynamic Equilibrium Models , 2012 .

[32]  R. Hertwig,et al.  Stability and change in risk-taking propensity across the adult life span. , 2016, Journal of personality and social psychology.

[33]  J. Campbell,et al.  By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior , 1995, Journal of Political Economy.

[34]  Giuseppe Cappelletti,et al.  Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Italian Micro-Evidence on Household Asset Allocation , 2012 .

[35]  Xiaohong Chen,et al.  Land of Addicts? An Empirical Investigation of Habit-Based Asset Pricing Models , 2004 .

[36]  Rainer Winkelmann,et al.  Consistent estimation of the fixed effects ordered logit model , 2015, SSRN Electronic Journal.

[37]  Thomas F. Crossley,et al.  Household Consumption through Recent Recessions , 2011 .

[38]  Pawel Zabczyk,et al.  Cyclical Risk Aversion, Precautionary Saving and Monetary Policy , 2011 .

[39]  Joost M.E. Pennings,et al.  Individual Investor Perceptions and Behavior During the Financial Crisis , 2012 .