Demographic structure and financial market risk structure: time-variant risk aversion in the life cycle


YI Zhen;ZHU Chao


Capital University of Economics and Business;Capital University of Economics and Business


Demographic change often shows a long-term trend. If age has an effect on one’s risk attitude and portfolio selection, the demographic structure will systematically influence the financial market risk structure. In most economic models, the constant risk aversion hypothesis that does not consider the possibility that the risk attitude of an economic entity varies with age may bias the mechanism of how a demographic structure affects the macro economy. This study aims to verify the time-varying risk aversion in one’s life cycle, and to predict the corresponding change it brings to the financial market risk structure. First, we present a simple theoretical model to describe the time-varying characteristics of investors’ risk aversion, and the factors that may affect the change in risk aversion. Second, we aim at building micro and macro empirical models. At the micro level, risk aversion is measured as subjective risk aversion, risky market participation, and investment portfolio. The subjective risk aversion data are directly obtained from the China Household Finance Survey (CHFS), while the latter two, labeled as objective risk aversion, are constructed from one’s risky market participation and from the ratio of risk-free assets to risky assets in one’s portfolio. The methods include the ordered logit model, Tobit model, and semiparametric model. At the macro level, the data are extracted from the World Bank World Development Indicators Database (WDI), Global Financial Development Database (GFD), and Health Nutrition and Demographic Database (HNPS). Third, we attempt to test the robustness by changing the alternative databases, conducting quantile regressions, and using a particular financial crisis subsample. Lastly, we check the demographic effect on the returns of financial assets, which provides a further discussion of the risk aversion law. Both the theoretical and empirical models reach consistent conclusions. The risk aversion of an economic entity exhibits time variability in the life cycle. At the micro level, risk aversion monotonically increases with age. At the macro level, the risk aversion of an economy changes with the population’s average age. Specifically, the young population tends to take more risks, while the middle-aged and elderly populations tend to show higher risk aversion and more conservative risk preferences. The rate of return on financial assets can also be explained from a demographic perspective. The juvenile population increases the rate of return on financial assets, while the middle-aged and elderly populations act in the opposite way. In fact, after considering risk preference, the time variance of people’s risk aversion does not show the same pattern as traditional life cycle theory suggests. In this paper, the macro and micro data show that the assumption of constant risk aversion is too strong in many economic models, and thus it needs to be re-evaluated to describe reality more accurately. We construct several indicators of risk attitude from the 2011 and 2013 CHFS data, which are large surveys of Chinese household finance covering almost 10, 000 families across China. From a macro perspective, we use the detailed demographic data on a 5-year basis and the financial and behavioral factors from 126 countries. Fundamentally, the risk aversion in one’s life cycle can be summarized as “the older the individual, the stronger his or her risk aversion.” This provides a potential hint for setting risk aversion parameters in subsequent research. Moreover, this paper extends the study of time-varying risk aversion to a macro scale. The implementation and reform of China’s population policy bring a dramatic change in the age structure of the population. The global population is also subject to a substantial demographic structure adjustment. The conclusions of this paper can help to predict the financial market risk structure from a demographic perspective.


risk aversion;life cycle theory;demographic structure;financial market risk structure


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Total: 47 articles

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