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The role of risk attitudes and expectations in household borrowing in Estonia

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  • Eva Brandten

Abstract

This study investigates the relations between risk attitudes and expectations and different aspects of borrowing by households in Estonia. The central research question is whether risk aversion and optimism provide additional information beyond the main economic and sociodemographic characteristics in explaining borrowing behaviour. The paper uses microdata from the Estonian Household Finance and Consumption Survey (HFCS) to estimate probit and Heckman models. My analysis shows that risk-tolerant households apply for loans more often than risk-averse households do and that their loans are larger. For mortgage loans, risk aversion is related to the probability of having a loan, whereas for non-mortgage loans, risk aversion is related to the size of the outstanding liabilities. The variables describing the household’s expectations for its future financial situation are on their own related to the decision to apply for a loan, but they do not contain any relevant additional information beyond the main economic and sociodemographic characteristics of the household

Suggested Citation

  • Eva Brandten, 2021. "The role of risk attitudes and expectations in household borrowing in Estonia," Bank of Estonia Working Papers wp2021-5, Bank of Estonia, revised 10 Nov 2021.
    • Handle: RePEc:eea:boewps:wp2021-5
    DOI: 10.23656/25045520/052021/0187
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    More about this item

    Keywords

    household debt; mortgage loans; non-mortgage loans; borrowing decisions; income and price expectations; risk attitudes; Household Finance and Consumption Survey;
    All these keywords.

    JEL classification:

    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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