Once in a Lifetime? The Effects of the Global Financial Crisis on Household Willingness to Take Financial Risk

Abstract

We investigate the effect of the global financial crisis (GFC) on household willingness to take risk. A model incorporating experienced returns as a determinant of risk tolerance is specified, with time‐varying weights on past stock returns capturing changes during the crisis. Results show that households became more myopic during the GFC, placing greater weight on more recent stock returns when evaluating financial risk attitudes. Households have been more sensitive to financial shocks during the GFC and post‐GFC periods, with the change in sensitivity found to be uniform over the life cycle and other household characteristics, but differing by income.