Why Was There More Household Stock Market Participation During the COVID-19 Pandemic?

• Published in: Finance research letters 2022-05, Vol.46, p.102481-102481, Article 102481
• Main Authors: Zheng, Wenyuan, Li, Bingqing, Huang, Zhiyong, Chen, Lu
• Format: Article
• Language: English
• Subjects: COVID-19 pandemic; Household equity value; Inverse S-shaped probability distortion function; Portfolio choice problem; Two-sided skewness
• ISSN: 1544-6123; 1544-6131; 1544-6131
• DOI: 10.1016/j.frl.2021.102481

Although the nation was experiencing an economic downturn due to the COVID-19 pandemic outbreak, we nonetheless observed an increase in household equity share value relative to both domestic market capitalization and retail investors’ trading volume. In this paper, we aim to interpret the reasons underlying this seemingly unexpected phenomenon. We investigate portfolio choices with stocks, bonds, and life annuities under an inverse S-shaped probability distortion function. The results indicate that people invest more heavily in risky assets and buy more annuities when reducing their savings in risk-free accounts, which is indeed consistent with the reality. •We find households’ stock market participation increases in crisis.•Our portfolio model with a probability distortion explains this phenomenon.•The distortion catches both investors’ risk aversion and positive expectation.