A test of the association between the initial surge in COVID-19 cases and subsequent changes in financial risk tolerance

Abstract

Purpose

The purpose of this paper is to provide an estimate of the degree to which financial risk tolerance changed in relation to the initial surge of COVID-19 cases in the US.

Design/methodology/approach

Data from a large sample of investors and other consumers covering the period beginning April 2019 and ending in early May 2020 were used to estimate aggregate levels of financial risk tolerance and to determine if the willingness to take financial risk changed across five distinct periods in relation to the spread of COVID-19.

Findings

A general reduction in aggregate levels of financial risk tolerance was observed during the initial peak of COVID-19 period and the subsequent declaration of a pandemic, with the most significant drop in risk tolerance being exhibited by those who were 25 years of age or younger.

Practical implications

The findings from this study – primarily that in terms of FRT, the COVID-19 pandemic impacted young people disproportionately – suggest that in addition to helping young people feel comfortable in terms of their personal health situation and access to employment and health insurance, policy makers, financial service firms and financial literacy educators should provide information and guidance to young people regarding why being willing to take financial risks is important and how FRT corresponds to the proper functioning of the investment markets.

Originality/value

A data-drive methodology was utilized in this study to define the periods. This approach was taken due to the lack of defined and published pandemic interval periods specific to COVID19. However, the findings based on the data-driven methodology bring practical implications such as young people are sincerely considered in the catastrophic situation.

Citation

Heo, W., Grable, J.E. and Rabbani, A.G. (2021), "A test of the association between the initial surge in COVID-19 cases and subsequent changes in financial risk tolerance", Review of Behavioral Finance, Vol. 13 No. 1, pp. 3-19. https://doi.org/10.1108/RBF-06-2020-0121