Housing Capital Gain And Household Stock-Market Participation

Traditional Portfolio Choice Theory assumes that:investors are rational, markets are complete, and all investors have standard preferences. As a result, people will invest in all kinds of financial markets, and the ratios of investment depend only on the risk preferences. However, this is not consistent with the behavior of investors observed in reality. The majority of people do not participate in the stock market, and the investors hold less than the deduction of the theories. This phenomenon is called stock market limited participation, which exist in many countries all around the world.In the last decade, the real estate market in China witnessed a surprising increase of housing price. Some families consumed houses or apartments at very low prices, and have obtained huge amount of housing capital gains.Based on the China Finance Survey dataset, this paper investigates the magnitude and mechanism of the impact of housing appreciation on stock participation as well as the ratio of stock investment from the perspective of household finance.It turns out that the families with more housing appreciation will be more likely to participate in stock market and will invest more in stock. Moreover, the whole samples are divided into two groups by different levels of income to analyze. For households with higher income, housing appreciation raises the likelihood of participating stock market. And for households with lower income, the main impact of housing appreciation is rising proportion of stock investment.