Financial Market Participation, Risk Heterogeneity, and Household Well-Being
YIN Zhichao, YUE Pengpeng, CHEN Xirong
School of Finance,Capital University of Economics and Business; School of International Trade and Economics, University of International Business and Economics
Summary:
Well-being is closely related to utility, and the literature is rich in factors that can influence well-being. Studies tend to use the terms “well-being” and “happiness” interchangeably. Some scholars point out that economic growth is unlikely to lead to happiness, but that economic crises, inflation, and unemployment reduce household well-being. From the perspective of income, some studies find that increased income does not significantly improve well-being, which is known as the happiness-income paradox. In this regard, scholars have proposed research perspectives such as an inverted U relationship between income and happiness, the effects of absolute and relative income on happiness, and the impact of income inequality on happiness. There are also studies on how the characteristics of individuals such as marriage, health, unemployment, social network relationships, and values affect happiness. Nevertheless, there is scant evidence of the impact of household investment on well-being. Several studies find that household financial assets, property, liabilities, and investment performance affect household well-being, and that household assets can have a significant positive effect on happiness. However, the literature has not considered the impact of financial market participation or the risk level of financial investments on household well-being. Our research question is whether financial market participation can improve household well-being and whether the riskiness of financial investments has a heterogeneous impact. First, we establish a theoretical model. Through our theoretical analysis, we find that financial market participation can affect household well-being through risks and returns. We then test the impact of financial market participation on household well-being using the 2015 China Household Finance Survey (CHFS) data. The CHFS includes detailed information on household assets and financial wealth, liabilities and credit constraints, income and insurance, and intergenerational transfers, demographics, and employment. We define household well-being through the CHFS questionnaire on the subjective well-being of respondents. We define households as participants in the financial market if they have demand deposits, time deposits, stocks, funds, financial products, bonds, derivatives, non-renminbi assets, gold, other financial assets, or any loans to others. To address endogeneity concerns, we use an instrumental variable and employ maximum likelihood estimation. The results show that participation in the financial market will significantly increase the possibility of household well-being. When households participate in the financial market, the possibility of household well-being will be improved by 18.77%. We further find that the risk heterogeneity of financial investments has a significant impact on household well-being: participation in low-risk financial investment increases the likelihood of household well-being by 20.56%, whereas high-risk financial investment significantly reduces it by 17.75%. We also find that participation in private lending significantly increases the likelihood of household well-being by 44.47%. The heterogeneous impact of private lending investment risk on well-being also exists. High-risk lending has a significant negative impact on happiness. This paper also finds that when households lend money to relatives, the likelihood of household well-being increases significantly by 7.58%. This paper provides new evidence for understanding the relationship between household financial investment behavior and happiness, and also provides a reference for the construction of a harmonious society.
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