When does a household invest in stocks?

What is it about?

We investigate the determinants of a household's decision on whether to invest in risky assets. Financial theory suggests that with increasing labor income risk, the reluctance of households to hold stocks increases. We propose to measure income risk as the observed variation of household income over a five year period. We find that indeed higher variation, i.e. higher income risk, reduces the propensity to invest in stocks. However, when controlling for household heterogeneity as well as subjective measures of a household's financial situation (income satisfaction, worries about financial situation), the impact of observed labor income variation vanishes. We therefore conclude that in particular the perception of risk and of the riskiness of the environment determines to a great extent the investment decision.

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Photo by Austin Distel on Unsplash

Photo by Austin Distel on Unsplash

Why is it important?

Private stock market investment is the key to saving for retirement age. Understanding which factors foster or prevent stock market investment of households is the key to shaping the political and legal framework.