A Study On The Wealth Effect Of Household Financial Assets In China

Financial asset wealth effect is the economic phenomena that the increasing financial asset prices make the wealth stock of the asset-holders increase and total consumption expenditures change. Wealth effect is asymmetrical, uncertain, time-lag, differentiatial etc.The paper describes the theoretical framework of wealth effect of household financial assets. Firstly, the article uses the Keynesian's absolute income hypothesis, Dusen Berry's relative income hypothesis, Modigliani's life cycle hypothesis, Friedman's permanent income hypothesis, Hall's rational expectations consumption function and other famous theory as clues to explain the theoretical basis of existence of the Financial assets wealth effect. Then, based on behavioral finance theory, the paper further explains the existence base of wealth effect from the expectations theory, the shadow of wealth, overconfidence and overreaction, herding etc. The paper also conducts detailed analysis on the transmission mechanism how the financial assets wealth effect influences consumption and presents many transmission channels, such as real income effect, expected income effect, liquidity constraint effect, the confidence effect, Tobin's q effect, substitution effect. Furthermore, the paper explains the Mechanism how the wealth effect influences economic growth from the aspects of Tobin's q effect, financial accelerator effect,investor confidence effect, employment effects, inflation effect and monetary policy effect.Based on Modigliani's Life Cycle Hypothesis and Friedman's permanent income hypothesis, using LC-PIH model, we made empirical research on the household financial assets'direct and indirect wealth effects, and pointed out that the main factors restricting the household Financial Assets' wealth effect consists of the scale of financial market, financial market participation, financial market volatility, wealth concentration, consumer confidence index, financial market efficiency. Among them, the scale of financial market, financial market participation, consumer confidence index, financial market efficiency are positively correlated with the wealth effect, financial market volatility, wealth concentration was negatively correlated with the wealth effect.Finally, we studied the wealth effect on macroeconomic growth from various angles such as asset selection behavior of residents, business investments, inflation effects etc, and pointed out that the wealth effect caused by stock price fluctuations will have different effects on household savings assets, risky financial assets,housing asset selection.Stock price fluctuations, through the Tobin effect, the financial accelerator effect and other effects,generate business investment effect.The main conclusions of the article are as follows:the direct wealth effect of the residents' stock assets is weak, the bond assets have slightly negative wealth effect; indirect wealth effect of stock assets is weak, indirect wealth effects of bond assets is more significant. We should improve the level of financial markets' development, narrow the wealth gap, enhance the social security system and encourage the innovation of financial instruments to improve the financial assets' wealth effect.