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Do Natural Disaster Experiences Limit Stock Market Participation?

Published online by Cambridge University Press:  09 September 2022

Sreedhar T. Bharath  and
DuckKi Cho
Sreedhar T. Bharath
Affiliation:
Arizona State University W. P. Carey School of Business sbharath@asu.edu
DuckKi Cho*
Affiliation:
Peking University HSBC Business School
*
duckki.cho@phbs.pku.edu.cn (corresponding author)
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Abstract

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We examine whether natural disaster experiences affect households’ portfolio choice decisions. Using data from the National Longitudinal Survey of Youth 1979, we find that adversely affected households are less likely to participate in risky asset markets. After a disaster shock, households become more risk-averse and lower their expectations on future stock market returns. Such conservative portfolio choices persist even after households relocate to less disaster-prone areas, consistent with risk preferences being altered by disaster experiences. Overall, our evidence suggests that transient but salient experiences can be an important factor in explaining the limited participation puzzle.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 29 - 70
Creative Commons
Creative Common License - CCCreative Common License - BYCreative Common License - NCCreative Common License - SA
This is an Open Access article, distributed under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike licence (https://creativecommons.org/licenses/by-nc-sa/4.0), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the same Creative Commons licence is used to distribute the re-used or adapted article and the original article is properly cited. The written permission of Cambridge University Press must be obtained prior to any commercial use.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to an anonymous referee, John Campbell, Yunling Chen, Lyungmae Choi, Jennifer Conrad (the editor), Sanjiv Ranjan Das, Rawley Heimer, David Hirshleifer, Wei Jiang, Steven Kaplan, Samuli Knüpfer, Lisa Kramer, Kaveh Majlesi, Hal Martin, Stefan Nagel, Matthew Pierson, Stephan Siegel, and Sunil Wahal, and seminar participants at Arizona State University, 2015 FMA Annual Meeting, 2015 Helsinki Finance Summit on Investor Behavior at Aalto University, Hong Kong Polytechnic University, 2015 Household Economics and Decision Making Conference of the Federal Reserve Bank at Cleveland, 2015 SFS Finance Cavalcade, 2015 Summer Research Conference at ISB, 2016 MFA Annual Meeting, Tsinghua University, and the University of Mannheim for helpful comments and suggestions. This article won the Outstanding Paper Award in Behavioral Finance at the 2016 MFA Annual Meeting. An earlier version of this article was circulated under the title “Ephemeral Experiences, Long-Lived Impact: Disasters and Portfolio Choice.” This research was conducted with restricted access to Bureau of Labor Statistics (BLS) data. The views expressed here do not necessarily reflect the views of the BLS. Any errors are our own.

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