The Effect of House Price Risk on Homeowners' Portfolio Choice

Abstract: Using the 2017 wave of China Household Finance Survey (CHFS), this paper studies how house price risk affects homeowners' stock market participation and share of liquid financial wealth invested in stocks conditional on not moving. Exploiting the subsample of homeowners whose tenure choices are exogenous due to the institutional changes during the Chinese housing market privatization, this study finds that the correlation between housing return and stock return has a crowding-out effect on both stock market participation and stock shares among participants. However, the general volatility of housing return has no significant effect on homeowners' portfolio choices. This paper also reconciles conflicting findings in previous studies. The effect of increased home equity on homeowners' stock share decisions is found to be insignificant among participants, and education attainment has no significant effect on stock share decisions among participants after risk aversion is explicitly controlled for.