Hostname: page-component-848d4c4894-x24gv Total loading time: 0 Render date: 2024-05-05T06:06:28.931Z Has data issue: false hasContentIssue false
  • English
  • Français

Do Natural Disaster Experiences Limit Stock Market Participation?

Published online by Cambridge University Press:  09 September 2022

Sreedhar T. Bharath  and
DuckKi Cho
Sreedhar T. Bharath
Affiliation:
Arizona State University W. P. Carey School of Business sbharath@asu.edu
DuckKi Cho*
Affiliation:
Peking University HSBC Business School
*
duckki.cho@phbs.pku.edu.cn (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We examine whether natural disaster experiences affect households’ portfolio choice decisions. Using data from the National Longitudinal Survey of Youth 1979, we find that adversely affected households are less likely to participate in risky asset markets. After a disaster shock, households become more risk-averse and lower their expectations on future stock market returns. Such conservative portfolio choices persist even after households relocate to less disaster-prone areas, consistent with risk preferences being altered by disaster experiences. Overall, our evidence suggests that transient but salient experiences can be an important factor in explaining the limited participation puzzle.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 29 - 70
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NCCreative Common License - SA
This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike licence (https://creativecommons.org/licenses/by-nc-sa/4.0), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the same Creative Commons licence is used to distribute the re-used or adapted article and the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to an anonymous referee, John Campbell, Yunling Chen, Lyungmae Choi, Jennifer Conrad (the editor), Sanjiv Ranjan Das, Rawley Heimer, David Hirshleifer, Wei Jiang, Steven Kaplan, Samuli Knüpfer, Lisa Kramer, Kaveh Majlesi, Hal Martin, Stefan Nagel, Matthew Pierson, Stephan Siegel, and Sunil Wahal, and seminar participants at Arizona State University, 2015 FMA Annual Meeting, 2015 Helsinki Finance Summit on Investor Behavior at Aalto University, Hong Kong Polytechnic University, 2015 Household Economics and Decision Making Conference of the Federal Reserve Bank at Cleveland, 2015 SFS Finance Cavalcade, 2015 Summer Research Conference at ISB, 2016 MFA Annual Meeting, Tsinghua University, and the University of Mannheim for helpful comments and suggestions. This article won the Outstanding Paper Award in Behavioral Finance at the 2016 MFA Annual Meeting. An earlier version of this article was circulated under the title “Ephemeral Experiences, Long-Lived Impact: Disasters and Portfolio Choice.” This research was conducted with restricted access to Bureau of Labor Statistics (BLS) data. The views expressed here do not necessarily reflect the views of the BLS. Any errors are our own.

References

Anagol, S.; Balasubramaniam, V.; and Ramadorai, T.. “Learning from Noise: Evidence from India’s IPO Lotteries.” Journal of Financial Economics, 140 (2021), 965–986.CrossRefGoogle Scholar
Angerer, X., and Lam, P.-S.. “Income Risk and Portfolio Choice: An Empirical Study.” Journal of Finance, 64 (2009), 1037–1055.CrossRefGoogle Scholar
Badarinza, C.; Campbell, J. Y.; and Ramadorai, T.. “International Comparative Household Finance.” Annual Review of Economics, 8 (2016), 111–144.CrossRefGoogle Scholar
Barberis, N.; Huang, M.; and Thaler, R. H.. “Individual Preferences, Monetary Gambles, and the Stock Market Participation: A Case for Narrow Framing.” American Economic Review, 96 (2006), 1069–1090.CrossRefGoogle Scholar
Barrot, J.-N., and Sauvagnat, J.. “Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks.” Quarterly Journal of Economics, 131 (2016), 1543–1592.CrossRefGoogle Scholar
Barsky, R. B.; Juster, F. T.; Kimball, M. S.; and Shapiro, M. D.. “Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study.” Quarterly Journal of Economics, 112 (1997), 537–579.CrossRefGoogle Scholar
Benartzi, S. “Excessive Extrapolation and the Allocation of 401(k) Accounts to Company Stock.” Journal of Finance, 56 (2001), 1747–1764.CrossRefGoogle Scholar
Bonaparte, Y.; Korniotis, G. M.; and Kumar, A.. “Income Hedging and Portfolio Decisions.” Journal of Financial Economics, 113 (2014), 300–324.CrossRefGoogle Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Memory, Attention, and Choice.” Quarterly Journal of Economics, 135 (2020), 1399–1442.CrossRefGoogle Scholar
Callen, M.; Isaqzadeh, M.; Long, J. D.; and Sprenger, C.. “Violence and Risk Preference: Experimental Evidence from Afghanistan.” American Economic Review, 104 (2014), 123–148.CrossRefGoogle Scholar
Cameron, L., and Shah, M.. “Risk-Taking Behavior in the Wake of Natural Disasters.” Journal of Human Resources, 50 (2015), 484–515.CrossRefGoogle Scholar
Campbell, J. Y. “Household Finance.” Journal of Finance, 61 (2006), 1553–1604.CrossRefGoogle Scholar
Campbell, J. Y., and Viceira, L. M.. Strategic Asset Allocation: Portfolio Choice for Long-term Investors. Oxford: Oxford University Press (2002).CrossRefGoogle Scholar
Chetty, R.; Sándor, L.; and Szeidl, A.. “The Effect of Housing on Portfolio Choice.” Journal of Finance, 72 (2017), 1171–1212.CrossRefGoogle Scholar
Choi, J. J.; Laibson, D.; Madrian, B. C.; and Metrick, A.. “Reinforcement Learning and Savings Behavior.” Journal of Finance, 64 (2009), 2515–2534.CrossRefGoogle ScholarPubMed
Cocco, J. F. “Portfolio Choice in the Presence of Housing.” Review of Financial Studies, 18 (2005), 535–567.CrossRefGoogle Scholar
Cocco, J. F.; Gomes, F. J.; and Maenhout, P. J.. “Consumption and Portfolio Choice over the Life Cycle.” Review of Financial Studies, 18 (2005), 491–533.CrossRefGoogle Scholar
Conley, T. G. “GMM Estimation with Cross Sectional Dependence.” Journal of Econometrics, 92 (1999), 1–45.CrossRefGoogle Scholar
Coval, J. D., and Moskowitz, T. J.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.CrossRefGoogle Scholar
Das, S.; Kuhnen, C. M.; and Nagel, S.. “Socioeconomic Status and Macroeconomic Expectations.” Review of Financial Studies, 33 (2020), 395–432.CrossRefGoogle Scholar
Ekeberg, Ø.; Seeberg, I.; and Ellertsen, B. B.. “The Prevalence of Flight Anxiety in Norway.” Nordisk Psykiatrisk Tidsskrift, 43 (1989), 443–448.CrossRefGoogle Scholar
Freeman, A., and Quercia, R. G.. “Low- and Moderate-Income Homeownership and Wealth Creation.” Policy Brief, UNC Center for Community Capital, UNC College of Arts and Sciences (2014).Google Scholar
Fung, H. H., and Carstensen, L. L.. “Goals Change When Life’s Fragility is Primed: Lessons Learned from Older Adults, the September 11 Attacks and SARS.” Social Cognition, 24 (2006), 248–278.CrossRefGoogle Scholar
Garrett, T. A., and Sobel, R. S.. “The Political Economy of FEMA Disaster Payments.” Economic Inquiry, 41 (2003), 496–509.CrossRefGoogle Scholar
Gomes, F. J. “Portfolio Choice and Trading Volume with Lossaverse Investors.” Journal of Business, 78 (2005), 675–706.CrossRefGoogle Scholar
Gomes, F.; Haliassos, M.; and Ramadorai, T.. “Household Finance.” Journal of Economic Literature, 59 (2021), 919–1000.CrossRefGoogle Scholar
Gomes, F., and Michaelides, A.. “Optimal Lifecycle Asset Allocation: Understanding the Empirical Evidence.” Journal of Finance, 60 (2005), 869–904.CrossRefGoogle Scholar
Guiso, L.; Sapienza, P.; and Zingales, L.. “Trusting the Stock Market.” Journal of Finance, 63 (2008), 2557–2600.CrossRefGoogle Scholar
Guiso, L., and Sodini, P.. “Household Finance: An Emerging Field.” In Handbook of the Economics of Finance, Vol. 2. Amsterdam: Elsevier (2013), 1397–1532.Google Scholar
Haliassos, M., and Bertaut, C.. “Why Do So Few Hold Stocks?” Economic Journal, 105 (1995), 1110–1129.CrossRefGoogle Scholar
Hurd, M.; Van Rooij, M.; and Winter, J.. “Stock Market Expectations of Dutch Households.” Journal of Applied Econometrics, 26 (2011), 416–436.CrossRefGoogle ScholarPubMed
Kaustia, M., and Knüpfer, S.. “Do Investors Overweight Personal Experience? Evidence from IPO Subscriptions.” Journal of Finance, 63 (2008), 2679–2702.CrossRefGoogle Scholar
Knüpfer, S.; Rantapuska, E.; and SarvimäkiI, M.. “Formative Experiences and Portfolio Choice: Evidence from the Finnish Great Depression.” Journal of Finance, 72 (2017), 133–166.CrossRefGoogle Scholar
Malmendier, U., and Nagel, S.. “Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?” Quarterly Journal of Economics, 126 (2011), 373–416.CrossRefGoogle Scholar
Malmendier, U., and Nagel, S.. “Learning from Inflation Experiences.” Quarterly Journal of Economics, 131 (2016), 53–87.CrossRefGoogle Scholar
Mankiw, N. G., and Zeldes, S. P.. “The Consumption of Stockholders and Nonstockholders.” Journal of Financial Economics, 29 (1991), 97–112.CrossRefGoogle Scholar
Merton, R. C. “Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case.” Review of Economics and Statistics, 51 (1969), 247–257.CrossRefGoogle Scholar
Rosen, H. S., and Wu, S.. “Portfolio Choice and Health Status.” Journal of Financial Economics, 72 (2004), 457–484.CrossRefGoogle Scholar
Samuelson, P. A. “Lifetime Portfolio Selection By Dynamic Stochastic Programming.” Review of Economics and Statistics, 51 (1969), 239–246.CrossRefGoogle Scholar
Smith, A. B., and Katz, R. W.. “US Billion-Dollar Weather and Climate Disasters: Data Sources, Trends, Accuracy and Biases.” Natural Hazards, 67 (2013), 387–410.CrossRefGoogle Scholar
Solon, G.; Haider, S. J.; and Wooldridge, J. M.. “What Are We Weighting For?” Journal of Human Resources, 50 (2015), 301–316.CrossRefGoogle Scholar
The Economist. “Fright or Flight: Modern Cures for a Fear of Flying” (2016).Google Scholar
Vissing-Jorgensen, A. “Towards an Explanation of Household Portfolio Choice Heterogeneity: Nonfinancial Income and Participation Cost Structures.” NBER Working Paper No. 8884 (2002).CrossRefGoogle Scholar
Vissing-Jorgensen, A. “Perspectives on Behavioral Finance: Does “Irrationality” Disappear with Wealth? Evidence from Expectations and Actions.” NBER Macroeconomics Annual, 18 (2003), 139–194.CrossRefGoogle Scholar
Weinstein, N. “Effects of Personal Experience on Self-Protective Behavior.” Psychological Bulletin, 105 (1989), 31–50.CrossRefGoogle ScholarPubMed
Yao, R., and Zhang, H. H.. “Optimal Consumption and Portfolio Choices with Risky Housing and Borrowing Constraints.” Review of Financial Studies, 18 (2005), 197–239.CrossRefGoogle Scholar
Supplementary material: PDF

Bharath and Cho supplementary material

Online Appendix

Download Bharath and Cho supplementary material(PDF)
PDF 971.6 KB