Influence of bull and bear market phase on financial risk tolerance of urban individual investors in an emerging economy

Abstract

PurposeThis study aims to analyze how risk tolerance is influenced by bull and bear market phases, age and professional work experience (PWE) of investors in emerging economies. The authors also analyze how different market phases (bull and bear) influence risk tolerance of investors in emerging economies for different age groups and with varying PWE.Design/methodology/approachThe study uses two quantitative methods, one-way ANOVA and hierarchical regression model (HLM) to analyze individual investors' financial risk tolerance (FRT) in India.FindingsThe authors find that age and PWE have positive relationship with FRT behavior. However, interactions of these variables with market phase variable indicate that risk tolerance has nonlinear increasing relationship with investor's age and PWE. The risk tolerance of older investors is consistently high in both bull and bear market conditions, while young investors display a nonlinear risk behavior in different market conditions.Practical implicationsThe study suggests that financial planners should include a longitudinal risk profiling of investors based on age groups, PWE and the current market phase to better understand investors' FRT and also to prefer more context-specific advice to investors in emerging economies, which, consequently, result in increasing the retail investors' interest in otherwise sparsely participated equity market.Originality/valueInteraction effect of bull and bear market phases on relationship between age and PWE and FRT has been scantly studied.