Income changes and participation in risky financial markets: Evidence from China

Abstract In China, household incomes have undergone significant changes due to rapid economic growth. While it is argued that income change may influence participation in risky financial markets, there is limited empirical evidence for China. Using national longitudinal survey data, this study first examines the impact of income change on the holding of risky financial assets (RFAs) in China. It uses fixed‐ and random‐effects models, and propensity score matching methods, to address endogeneity issues. The empirical results indicate that income change reduces the likelihood of holding RFAs and their shares. The negative effect of income change on participation in risky financial markets varies by demographic group. This effect is more pronounced among middle‐aged and elderly individuals, women, and urban residents compared to their counterparts, including youth, men, and rural residents. The findings suggest that policies aimed at reducing income risk may promote the development of the stock market.