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Macroeconomic experiences and risk taking of euro area households

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  • Ehrmann, Michael
  • Ampudia, Miguel

Abstract

This paper studies to what extent the experiences of households shape their willingness to take financial risks. It follows the methodology of Malmendier and Nagel (2011) and applies it to a novel data set on household finances covering euro area households. We show that experienced stock market returns matter in a statistically significant and economically substantial fashion: better experiences increase the financial risk households are willing to take as well as stock market participation along the intensive and the extensive margin. We find that more distant experiences receive a somewhat lower (but still substantial) weight than the corresponding findings suggest for the United States. Furthermore, there are additional effects stemming from the experience of extreme stock market downturns. 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. The evidence highlights the relevance of personal experiences for household behaviour. JEL Classification: D03, D14, D83, G11

Suggested Citation

  • Ehrmann, Michael & Ampudia, Miguel, 2014. "Macroeconomic experiences and risk taking of euro area households," Working Paper Series 1652, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20141652
    Note: 203739
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    References listed on IDEAS

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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:eee:dyncon:v:101:y:2019:i:c:p:187-210 is not listed on IDEAS
    3. Barasinska, Nataliya & Haenle, Philipp & Koban, Anne & Schmidt, Alexander, 2019. "Stress testing the German mortgage market," Discussion Papers 17/2019, Deutsche Bundesbank.
    4. repec:vul:omefvu:v:8:y:2017:i:2:id:234 is not listed on IDEAS
    5. Jie Zhou, 2018. "Household Stock Market Participation During the Great Financial Crisis," Departmental Working Papers 2018-02, The University of Winnipeg, Department of Economics.
    6. repec:vul:omefvu:v:9:y:2017:i:2:id:234 is not listed on IDEAS
    7. Jie Zhou, 2015. "Household Stockholding Behavior During the Great Financial Crisis," Staff Working Papers 15-15, Bank of Canada.
    8. 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.
    9. Ondřej Krčál & Rostislav Staněk & Martin Slanicay, 2019. "Made for the job or by the job? A lab-in-the-field experiment with firefighters," MUNI ECON Working Papers 2019-05, Masaryk University.

    More about this item

    Keywords

    household finance; learning; portfolio choice; rare disasters; risk-taking behavior;

    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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