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 the HFCS data, household subjective financial risk tolerance, stock ownership, and mutual fund ownership are all found to be increasing with household income, wealth, education, and home-ownership. Younger households are found to be more willing to take financial risks while at the same time being less likely to hold any investments into the stock markets. Using propensity score matching, the differences in risk tolerance between Southern and Northern European households remain statistically significant, suggesting that institutions play a significant role in explaining the level differences. As these institutional differences are highly persistent over time, macroeconomic conditions matter a lot in explaining the time variation in risk tolerance. In a strictly balanced German PHF, the changes in household's willingness to take financial risk over time are found to correlate positively with changes in household income and negatively to changes in financial literacy. Changes in home-ownership status are found to have a negative relation to changes in stock ownership, in line with the crowding-out hypothesis.