Extreme heat and stock market participation: Evidence from China

This paper investigates the impact of extreme heat exposure on household financial risk-taking. Using data from the China Household Finance Survey (CHFS) and meteorological data, we find that extreme heat has a statistically and economically significant negative effect on households' stock market participation and the share of risky assets in their portfolios. This deterrent effect is robust across a comprehensive series of identification checks and alternative specifications. We identify three primary channels through which this effect operates: updated climate beliefs, uninsurable income shocks, and health shocks. Notably, our heterogeneity analysis reveals that more financially sophisticated households—those with higher income and literacy—exhibit a stronger negative response. This suggests that the withdrawal from risky assets is not merely a passive reaction to liquidity needs but an active response to heightened risk perceptions, consistent with theories of disappointment aversion. Moreover, we find that the negative impact of extreme heat is attenuated for households with better access to credit and stronger social capital, but is amplified for those with financial constraints such as mortgage debt. Our findings provide micro-level evidence on how a pervasive physical climate risk shapes household portfolio choice.