The determinants of household risky asset holdings: Australian evidence on background risk and other factors

Abstract

a b s t r a c tWe study the portfolio allocation decisions of Australian households using the relatively new Household, Income and Labour Dynamics in Australia (HILDA) Survey. We focus on household allocations to risky financial assets. Our empirical analysis considers a range of hypothesised determinants of these allocations. We find background risk factors posed by labor income uncertainty and health risk are important. Credit constraints and observed risk preferences play the expected role. A positive age gradient is identified for risky asset holdings and home-ownership is associated with greater risky asset holdings. A unifying theme for many of our empirical findings is the important role played by financial awareness and knowledge in determining risky asset holdings. Many non-stockholding households appear to lack the experience and financial literacy that might enable them to benefit from direct investment in stocks.

The Influence of Financial Risk Tolerance on Investment Decision-Making in a Financial Advice Context

“…This positive association is in accordance with prior research (e.g., Hariharan et al 2000;Cardak & Wilkins 2009) and was also confirmed in the sensitivity analysis. Furthermore, risk tolerance was found to intervene in the relationship between financial literacy and decision-making, suggesting that less financially literate clients who tend to be less risk tolerant are more likely to allocate their funds into less risky assets.…”

“…Notably, it has been reported that risk tolerant individuals tend to invest less in risk free assets (Hariharan et al 2000) or risk averse households are more likely to have a lower proportion of their assets allocated in risky assets (Cardak & Wilkins 2009). Consistent with these studies, it is logical to expect (H7) that risk tolerant clients tend to invest in riskier products compared to less risk tolerant ones.…”

“…Extending the literature, the study included client trust in the financial advice service, relationship length with the service, and client financial literacy as risk tolerance determinants in its framework. Financial risk tolerance was then posited to have a positive relationship with client investment decision (asset allocation) as more risk tolerant investors tend to invest more in risky assets (Hariharan et al 2000;Cardak & Wilkins 2009). …”

“…Risk tolerance has been found to significantly affect risky decision-making in different financial/investment contexts (e.g., Yuh & DeVaney 1996;Hariharan et al 2000;Cardak & Wilkins 2009). Notably, it has been reported that risk tolerant individuals tend to invest less in risk free assets (Hariharan et al 2000) or risk averse households are more likely to have a lower proportion of their assets allocated in risky assets (Cardak & Wilkins 2009).…”

Household Portfolio Choices, Health Status and Health Care Systems a Cross-Country Analysis Based on Share

“…Subsequent empirical studies that have used panel methods to control for unobserved heterogeneity find either no direct effect or a small direct effect of health status on portfolio choices (see for example, Gupta, 2007;Coile and Milligan, 2009;Fan and Zhao, 2009;Love and Smith, 2010). Cardak and Wilkins (2009) find that the relationship between poor health status and risky asset holding becomes insignificant once risk and time preference variables are controlled for, using the Household Income and Labour Dynamics in Australia (HILDA) Survey. The authors argue that Australia's protective universal health care system might well play a role in explaining the absence of a direct effect, but do not take this element explicitly into account in their empirical analyses.…”