Download This PaperDo Natural Disaster Experiences Limit Stock Market Participation?
Journal of Financial and Quantitative Analysis, volume 58, issue 1, 2023 [10.1017/S0022109022000680]
103 Pages Posted: 13 Feb 2015 Last revised: 29 Mar 2021
Date Written: March 7, 2021
Abstract
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.
Keywords: Limited Stock Market Participation, Natural Disasters, Risk taking, Expectations, Preferences
JEL Classification: D81, G11, O12
Suggested Citation: Suggested Citation