Household Financial Risk Tolerance in Europe
Authors: Nora Laurinaityte (Goethe University and SAFE)
Title: Household Financial Risk Tolerance in Europe
Abstract: This study examines the differences in household financial risk tolerance across the Eurozone countries and over time. Using data from 2009-2011 and 2013-2015 Household Finance and Consumption Survey (HFCS) household subjective financial risk tolerance, stock ownership, and mutual fund ownership are all found to be increasing with household income, household wealth, education, and home-ownership. Younger households are found to be more willing to take financial risks than older households, while at the same time being less likely to hold any investments into the stock markets. These covariates cannot explain neither the observed differences in risk tolerance levels across 12 Eurozone countries studied, nor the significant variation in household financial risk tolerance across the two survey waves. In the propensity score matched set-up, the differences in risk tolerance between Southern and Northern European households remain statistically significant, suggesting that institutions and culture are likely to play a significant role in explaining the level differences. In a strictly balanced panel set-up using the German Panel on Household Finances (PHF) data from 2010 and 2014, only the changes in household income are found to have a significant correlation with the changes in household´s willingness to take financial risk over time. Changes in household subjective risk tolerance are found to correlate negatively with changes in financial literacy, and changes in home-ownership status are found to have a negative relation to changes in stock ownership, in line with the “crowding-out” effect housing has on the risky allocation in prevalent theoretical models.