UNIVERSITY OF SARAJEVO

SCHOOL OF ECONOMICS AND BUSINESS

HOUSEHOLD STOCK MARKET PARTICIPATION DURING THE

GREAT FINANCIAL CRISIS

LITERATURE REVIEW

Subject: Invesment
Mentor: Zaimović Azra PhD.
Student: Arijana Tirak 72685
Studies: FM/MM
Concentration:Financial management

SARAJEVO, APRIL 2019

Contents
1. Introduction ......................................................................................................................... 3

2. Methodology ....................................................................................................................... 3

3. Results ................................................................................................................................. 6

4. Discussion ........................................................................................................................... 8

5. Conclusion ........................................................................................................................ 10

6. Refrences ........................................................................................................................... 11
 1. Introduction
Should I as an individual invest? That is a main question in this paper. Household participation
in the financial market is an important factor of the economy of a country. This paper explores
what studies of the problem of household participation have been done and what are their
conclusions.

In the first parth of this paper the data and methodology of each article will be explained as well
as some restrictions on the samples some atricles migh have. Next the resoults of mentioned
articles will be presented as well as explained the meaning they have. In the next section there
will be a discution of the results from the aticles and of the state of household participation.
Lastly, in the conclusion a quick recap of everyting will be said and what esle could be explored
in this area of economy.

2. Methodology
How a researcher processes the data they have colectes is very important for a sucessful
research. The type of data collected and methodologies used in each article is listed below.

Household Stock Market Participation During the Great Financial Crisis

The PSID is the longest running longitudinal household survey in the world. The study began
in 1968 with a nationally representative sample of over 18,000 individuals living in 5,000
families in the United States. PSID gathers data on demographics, employment, income, wealth
and numerous other topics. Since 1997 the data has been collected biennial. Since this article
covers the period before and after the grat crisis, they analyzed the data from 2007 and 2009.

They set some limitations to what households can be included in the sample. The criteria is as
following:

1. The household was interviewed in both the 2007 and the 2009 surveys
2. There was no change in the head of the household
3. Wealth can be observed for the household (either the value of each asset class is given
by the respondent or that it can be estimated using the information provided by the
respondent)
4. The household had positive financial assets in at least one of the two surveys
 5. The household was not part of the Survey of Economic Opportunity (SEO) sample
(second sample of individuals was drawn from lower income levels)

The main purpose of this article is to determine how did the structure of households
participating in the market. The focus was on how many households entered and exited from
the market during those two years. They also analysed the structure of the population that exited
the market. In shor they used descriptive statistics to analyze the selected data.

Stock Market Participation Puzzle in Emerging Economies: The Case of Lithuania

The article tried to determine which factors contribute the most to the low household
participation in investment funds and bonds and a relatively high participation in the realestate
market. During the 2016 The Household Finance and Consumption Survey it was noticed that,
compared to other european countries, Lithuanian households have a smaller participation in
the stock market, but have a larger participation in the realestate market.

The researchers choose to do a survey to determine what factors contribute to previously

mentioned market behaviour of the households. They also used Descriptive analysis and two
sample t-tests were used to assess unconditional effect of selected factors on household
participation rate. The survay consisted of two parts:

a) General factors identified in previous research that might explain the “stock market
participation puzzle”
b) Country-specific questions identified during presurvey interviews with selected
investment experts

The survay did not encompas the population at large, but insted focused on the wealthy
individuals from:

a) Clients of Nordea Markets Lithuania

b) Members of Lithuanian Rotary clubs
c) Alumni of BMI Executive MBA

The researchers deliberately places such narow criteria in order to increase the response and to
awoid some sensitive questions, such as lewer of income. In essence this article also used
descriptive statistics.
The Effect of House Price on Stock Market Participation in China: Evidence from the
CHFS Microdata

Data was used from the Survey and Research Centre for China Household Finance. They first
conducted its research in 2011 and it was the first time any micro data was collected on this
subject in China. The data form the 2011 and 2013 surveys were used for the analysis. The
focus of the surveys they conduct is on the household data including household assets, financial
assets, debts, income, demographic characteristics, and so on. When conducting the Probit
analysis the participation decision was taken as a dependent variable. This was a simple yes or
no answer to the question “Does your family have any stock accounts?”. The independent
variable in this study is the macro house price of the city that each household lives in, measured
by ten thousand yuan per meter squared. Some covariates were also used such as education,
income, marital status, age etc.

The Role of Objective and Subjective Financial Literacy in Stock Market Participation:
The SCF Evidence

This article is soley focused on the conection between the financial literacy of the households
and their participation in the stock market. Like in the prevous article they use the regression
analysis with the dependent variable beeing the households stock holding and the independent
variable beeing their financial literacy. They used the data from the Survey of Consumer
Finances from 2016. Unlike the prevous Surveys of Customer Finances, the 2016 survey aded
new variables. One of the additionas vas the objective financial literacy variable or FinLit and
the subjective financial literacy variable or FinKnow. FinLit is the number of correct responses
to the three new financial literacy questions. FinKnow is the self-rated assessment report by the
household about their financial knowledge on a scale from zero to ten.

Smart Money: The Effect of Education on Financial Behavior

This article uses data from multiple sources: the U.S. Census, the Federal Reserve Bank of New
York Consumer Credit Panel/Equifax dataset, and the National Longitudinal Survey of Youth
(NLSY). The main focus here is how does an education level affect the probability of a positive
investment income, meaning they analysed the patterns of behavior among those who are a
already active on the market. An important distinction here is made between investment income
(income from interest, dividends, net rental income, royalty income, or income from estates and
trusts) and retirement income (retirement, survivor, or disability pensions). Besides the result
of the investment income, this article explores the relation between the education level and and
credit scores

Stock Market expectations of Dutch Households

The information was gathered using the CentER panel. The panel operates on the principal that
a random sample of the Dutch-speaking population was provided with a computer, modem and
software to communicate by telephone with a central computer located at the University of
Amsterdam. Using this system, interviews could be sent to the respondents, who could then fill
in the questionnaires (off line), and return the responses to the central computer. Paralel to this
type of data colection, the data from the DNB Household Survey (DNS) was used. It gatlers
data every spring about the participants in the survay such as: employment, pensions,
accommodation, mortgages...The invervies were conducted in April 2004 and April 2006.
They used descriptiv statistics to alalyze the data they collected.

3. Results
The results of each article are crucial in explaining the current situation in the household
participation.

Household Stock Market Participation During the Great Financial Crisis

After detailed analysis of the changes in the market participation during the great crisis it was
determined that the participation of households droped by 2,9 percentage points, which equates
to 5,9% decline. It was also noticed that less-educated households, poor households and
households with heads belonging to a minority are the ones that dropped out of the market after
the market crash. Also, it is more likely that households drop out of stock market if they own a
private pension coverage, unlike non-retirement accounts.
Stock Market Participation Puzzle in Emerging Economies: The Case of Lithuania

The paper finds that lack of financial literacy, low risk tolerance and lack of trust in financial
institutions are the three key factors explaining low stock market participation rate among
Lithuanian households. It is noteworthy that exactly these three factors explain high household
participation rate in local real estate market.

Finally, it is worth mentioning that Lithuanian households have very low risk tolerance and
high distrust in financial intermediaries, which may explain why an overall level of stock
market participation in Lithuania is among the lowest in Europe.

The Effect of House Price on Stock Market Participation in China: Evidence from the
CHFS Microdata

Trough regresion analyis it was determined that with the increase of one thousand RMB per
square meter in macrohouse price, the probability that each household in that city to participate
in the stock market will increase by 5.4%. It was found that the increase in house pricing will
stimulate those who have not entered the stock market, but it is dicoureging those who have
already been involved and cousing them to invest less.

For the effect on the stock market participation depths, the negative effect of house price will
get even more intense with the increase of the area of self-owned housing, while the effect of
house price on the decision whether or not to participate in the stock market among those who
own no housing is insignificantly negative. Furthermore, the increase of house price will
decrease the possibility of not participating in the stock market due to the reason of “Limited
funds” and will increase that due to the reason of “Returns too low,” for those who don’t
participate in the stock market, and the controlling of wealth will make the former one not
significant anymore, also indicating the effect of wealth.

The Role of Objective and Subjective Financial Literacy in Stock Market Participation:
The SCF Evidence

After the regresional analysis the researchers concluded that the objective financial literacy has
a significant impart on the probability that a household will participate in the financial market
directly or indirectly. The probability of a household to pariticape in the stock invesment
increases by 14,50% when getting one additional question correct on the FinLit part of the
survay. When it comes to subjective literacy it was calcuated that with each additional
selfscoring the probability of participating in the stock invesments decreases by 1,6%.

Smart Money: The Effect of Education on Financial Behavior

It was determined that the education level had a significant impact on the was a household may
manage their financials. Individuals with one more year of schooling are 7.5 percentage points
more likely to report positive investment income. When it comes to credit scores an additional
year of schooling raises an individualís credit score by 8 points.

Stock Market expectations of Dutch Households

The general view of the Dutch households was very pesimistic. The average subjective
probability of an increase in stock values over a year was just 41,60% in 2004 and 50,10% in
2006. On the other hand there is a noticable positive diffecence between probabilities from 2004
to 2006. The incerase in optimism sugests there was an improvement in the stock market in the
netherlands durin this period.

4. Discussion
Trought prevusly rewieved articles it was consantly emphasised how important was it for
households to participate in some way in the financial markets, specialy in the stock market.
Many households that have disposable income are missing out on the opportunity to increase
their welth. Most household like holding cash in hand or in their savings account. This means
that they have an opportunity cost, because they could have invested that money in some form
of a security. Even if they are risk averse they coud invest in a goverment bond or some other
low risk security.

The lack of household participation is also making it difficult for the domestic financial service
sector to develop. This also indirectly affects the development of the economy of the country
as a whole. The stronger the financial service sector is the stronger the economy of that country
is.
Another downsitre to low household participation in the financial market is the case of state
issued security (goverment bond, municipal bond etc.). Without the participation of the
households it is more difficult to rise the funds necessery to finish the project. According to the
„Changing patterns in household ownership of municipal debt: evidence from the 1989-2013
surveys of consumer finances“ in the period between 1989 until 2013 the share of households
holding any municipal debt fell from 4,60% to 2,40%. During the same period the e share of
total debt that is held by the wealthiest 0,50% of households rose from 24% to 42%.

The articles rewieved try to analyze what factors contribute to the individuals decision to invest
in the stock market ( with the exeption of the case of the Duch households). The bigest issue is:
„Why are households not paritcipatin?“.

One of the major factors in multile articles was the financial literecy (or lack there of). Many
households lack sufficient knowlage to understant how does the financial sector work and what
opportunities they have.

Another concering reason for the lack of participation is the lack of trust. Even idividuals who
have the sufficient knowlage do not trust that the financial institutions will do their job. This
furder reaises the question of „Why are individuals so pesimistic and sceptical towards the
financial industry?“ From the first article analyzes it can be seen that the participation droped
significantly becouse, among other thing, there was an decrease in trust.
 5. Conclusion
It is generaly agreed that the household participation in the financial market is crucial for the
economy of any country. The articles mentioned in this literature rewiew did a great job at
exploring the reasons for low participation. Main ones being financial literacy, risk aversion,
lack of trust in financial institutions.

The „Household Stock Market Participation During the Great Financial Crisis“, „Stock Market
Participation Puzzle in Emerging Economies: The Case of Lithuania", „The Effect of House
Price on Stock Market Participation in China: Evidence from the CIFS Microdata“ and „The
Role of Objective and Subjective Financial Literacy in Stock Market Participation: The SCF
Evidence“ articles have a similar note in the fact that they explore different aspects what exactly
does impact an individual's decision to invest in some form in the financial market.

The „Smart Money: The Effect of Education on Financial Behavior“ takes a different aporoach
and determines how does the level of education effect the behaviour of the individuals who are
already investin in the market. This article is useful becoues it showe that wtih the increase in
eduacation ( e.i. financial literacy) an individual has a greater chance of acheaving the positive
invesment income.

The „Stock Market expectations of Dutch Households“ also takes a different approach and
determines how the households wiew the financial market in general. This article compliments
the findings from the prevous ones in the sence that the households are geleraly sceptical in the
financial service sector.

All of the prevously mentioned articles have been focused on the past and what are the couses
of the current state. Finding out what happent is crucial but it does not provide us with the
solution. It would be useful to conduct a surbey on what could be done to imporve the situation.
What can be done to educate an average household that is not financialy literate. What can be
done to increase the confecence.
 6. Refrences
Articles:

1. Daniel Bergstresser and Randoph Cohen. ( Juli 2016). Changing patterns in household
ownership of municipal debt: Evidence from the 1989-2013 surveys of consumer
finances. Hutchins Conter on Fiscal & Monetary Policy at Brookings. Woring paper no.
20
2. Federica Teppa and Corrie Vis. ( 2012). The CentERpanel and the DNB Household
Survey: Methodological Aspects. Occasional Studies. Vol.10/No.4
3. Michael Hurd, Maarten van Rooji and Joachin Winter. (November 2009). Stock Market
expectations of Dutch Households.
4. Shawn Cole, Anna Paulson and Gauri Kartini Shastry (April 11, 2012), Smart Money:
The Effect of Education on Financial Behavior. Harvard Business school.
5. Jie Zhou (September 2018), Household Stock Market Participation During the Great
Financial Crisis
6. Xiaoyu Chen and Xiaohao Ji. (2017). The Effect of House Price on Stock Market
Participation in China: Evidence from the CHFS Microdata.
7. Yuan Yuan. (2018). The Role of Objective and Subjective Financial Literacy in Stock
Market Participation: The SCF Evidence. Jurnal of Accounting and Finance Vol 18(10).
8. Žygimantas Mauricas, Prof. dr. Valdonė Darškuvienė and Tamara Mariničevaitė.
(2017). Stock Market Participation Puzzle in Emerging Economies: The Case of
Lithuania.

Online:

1. The Panel Study of Income Dynamics (PSID). (last accesed 25.04.2018)

https://psidonline.isr.umich.edu/
2. Survay of Consumer Finances(SCF). (Last accesed 26.04.2018.)
https://www.federalreserve.gov/econres/scfindex.htm