Unexpected Housing Wealth Appreciation and Stock Market Participation

Abstract

This study examines the causal effects of housing wealth appreciation on the stock market participation of households in China. Households that purchase a house with an area less than or equal to 90 m2 faced a significantly lower down payment following the unexpected announcements of a series of policies beginning in 2006, thus creating discontinuity in house size and a housing price jump around the cutoff point. Using the policy shock to implement a regression discontinuity design, we find the following: (1) Unexpected housing wealth appreciation substantially promotes households’ stock market participation. (2) The housing wealth effect relaxes households’ liquidity constraints and thus encourages them to invest in stocks. (3) The housing wealth effect is pronounced among younger individuals and employees of state-owned enterprises. Our findings support the positive housing wealth effect on stock market participation and provide clear policy implications for regulators.

Keywords: housing appreciation; stock market participation; regression discontinuity; China