How Does Households' Wealth Affect Portfolio Choices?
Purpose: The aim of this paper is to identify the determinants of households’ preferences regarding financial asset allocation. It investigates the structures of households’ financial asset portfolios in 15 euro area countries. It assumes three risk classes and presents a comprehensive picture of an average portfolio at the domestic and euro area levels. Methodology: The research is based on the Eurosystem HFCS data. It applies the fractional multinomial logit model which allows analysing parallel movements in all shares of portfolio components resulting from the changes in households’ wealth. Findings: The results obtained allow drawing conclusions about the heterogeneity of households’ investment preferences on the financial markets across the euro area. However, in all analysed member countries, deposits can be perceived as a component of primary importance as well as a substitute to voluntary pension plans and whole life insurance contracts. The results from the fractional multinomial logit model lead to a general finding that wealthier households are more open to risk exposure than those less affluent. The most useful wealth measures regarding the aim of the study were net wealth, total financial assets, and annual gross incomes. Their adoption to the model allowed identifying the countries like France, Finland, or Italy where the effect of the deepening changes in portfolio structure caused by the continuous increase in households’ wealth was identified. Additionally, Austria, Finland, France, and Italy were recognised as the member states of the most significant differences in this regard between the most distant classes of households - the poorest and the most affluent. Practical implications: This study allows cross-country comparison of the investment preferences of the households characterised by similar financial standing. The results obtained are relevant to the discussion on households' portfolio choices, and growth potentials of the retail financial market in the euro area. Originality/Value: The main contribution of this study to the literature is the knowledge on how the differentiated wealth of the euro area households influences the risk profiles of their financial asset portfolios.