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Macroeconomic experiences and risk taking of euro area households

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  • Ampudia, Miguel
  • Ehrmann, Michael

Abstract

This paper studies to what extent the experiences of households shape their willingness to take financial risks. It starts by extending the U.S. evidence of Malmendier and Nagel (2011) to euro area households, and shows that experienced stock market returns matter in a statistically significant and economically substantial fashion: better experiences make households more willing to take financial risk and increase their stock market participation, even if euro area households seem to be discounting the past more quickly than those in the United States. Subsequently, the paper moves on to show that there are additional effects stemming from the experience of stock market crashes – which are different from those of stock market booms. Crashes stay in household’s memory and lower stock market participation, whereas booms raise participation, but their effect eventually fades out. Furthermore, households in countries that witnessed a particularly severe 2008 stock market crash give substantially more weight to the most recent experience, suggesting that in these countries an even more pronounced underinvestment in the stock market should be expected in the years to come.

Suggested Citation

  • Ampudia, Miguel & Ehrmann, Michael, 2017. "Macroeconomic experiences and risk taking of euro area households," European Economic Review, Elsevier, vol. 91(C), pages 146-156.
  • Handle: RePEc:eee:eecrev:v:91:y:2017:i:c:p:146-156
    DOI: 10.1016/j.euroecorev.2016.09.012
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    Cited by:

    1. Goldfayn-Frank, Olga & Wohlfart, Johannes, 2018. "How do consumers adapt to a new environment in their economic forecasting? Evidence from the German reunification," IMFS Working Paper Series 129, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    2. repec:vul:omefvu:v:8:y:2017:i:2:id:234 is not listed on IDEAS
    3. Jie Zhou, 2018. "Household Stock Market Participation During the Great Financial Crisis," Departmental Working Papers 2018-02, The University of Winnipeg, Department of Economics.
    4. repec:vul:omefvu:v:9:y:2017:i:2:id:234 is not listed on IDEAS
    5. Jie Zhou, 2015. "Household Stockholding Behavior During the Great Financial Crisis," Staff Working Papers 15-15, Bank of Canada.
    6. Vellekoop, Nathanaël, 2016. "The impact of long-run macroeconomic experiences on personality," SAFE Working Paper Series 142, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

    More about this item

    Keywords

    D03; D14; D83; G11; Risk-taking behavior; Household finance; Learning; Portfolio choice; Rare disasters;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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