The Effect of Home Equity on the Risky Financial Portfolio Choice of Chinese Households

ABSTRACT

Using a large and unique household level dataset, we examine the effect of home equity appreciation during the housing boom on shareholdings of risky financial assets that include stocks, funds, bonds, and wealth management products. We address potential endogenous problems by employing two instrumental variables. The 2SLS estimates suggest that a 10% increase in home equity level leads Chinese households to raise the share of total risky financial assets by 0.6 percentage points. Conversely, a 10% increase in housing share crowds out the share of total risky assets by 2.5 percentage points, which is greater than the magnitude of home equity effect. Our results further show heterogeneous effects of home equity across city tiers and household characteristics, which offers an important policy implication.

KEY WORDS:

• Chinese households
• home equity
• portfolio choice
• risky financial assets

Acknowledgments

We are very grateful for the suggestions and comments raised by editor Ali Kutan and anonymous reviewers. We thank Dayong Zhang, Albert Saiz, Mengmeng Guo, and numerous seminar participants for helpful discussion and comments. All errors are our own.

Notes

1. For detailed China household assets, please access the report of China Household Finance Survey (CHFS) http://101.110.118.64/econweb.tamu.edu/gan/Report-English-Dec-2013.pdf.

2. An exhaustive list of observed covariates is summarized in Table 1.

3. The official website has detailed information about CHFS: www.chfsdata.org or http://chfs.swufe.edu.cn/.

4. The CHFS official website has detailed introduction to the survey design and quality control.

5. The gender can be changed if the household head has been changed for a family due to reasons such as death or marriage during the survey period. The variable on gender thus has not been excluded in the fixed effects.

6. Based on city population size and the level of economic development, Beijing, Shanghai, Guangzhou, and Shenzhen are defined as first-tier cities. The second-tier cities include Chongqing, Tianjin, Hangzhou, Chengdu, Wuhan, Nanjing, Xiamen, Harbin, Changchun, Shenyang, Dalian, Jinan, Qingdao, Ningbo, and Xi’an, and the remaining prefectural level cities are classified as third-tier cities.

Additional information

Funding

This work was supported by the Fundamental Research Funds for the Central Universities: [Grant Numbers JBK171115, JBK1805006].