Gender matters most. The impact on short‐term risk aversion following a financial crash

• Date: 01 January 2019
• Author: Diego A. Agudelo,Ignacio Arango,James Byder
• DOI: http://doi.org/10.1002/rfe.1038
• Published date: 01 January 2019

SPECIAL ISSUE ARTICLE

Gender matters most. The impact on short-term risk aversion

following a financial crash

James Byder

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Diego A. Agudelo

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Ignacio Arango

Finance Department, Universidad EAFIT,

Medellín, Colombia

Correspondence

James Byder, Universidad EAFIT,

Medellín, Colombia.

Email: jbyder@eafit.edu.co

Abstract

This paper examines how investors in an emerging market react to a domestic

financial crisis. We conjecture that risk aversion increases following such events

and that the effect is more pronounced among specific groups of investors. Our

study makes use of a unique dataset of mutual fund investors from one of Colom-

bia's largest stock brokers. Our results reveal that women and self-employed indi-

viduals make the largest withdrawals from risky funds after financial crises.

KEYWORDS

financial crisis, fund flows, individual investor, risk aversion

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INTRODUCTION

How does a financial crisis affect our risk preferences in emerging markets? We investigate this question by observing the

reaction of a large number of Colombian mutual fund investors to a domestic financial crisis. In November 2012, Inter-

bolsa, Colombia's largest stockbroker, was forced to close when it defaulted on debts within the local banking system. At

the time of its collapse, Interbolsa accounted for 30% of Colombia's brokerage activity by market volume. Its demise sent

shockwaves throughout the region and shook confidence in an up-and-coming financial sector. To what extent did this

event affect short-term risk preferences, and were certain groups of investors more likely to react than other s? Little

research has been conducted in emerging economies about the role capital market shocks play in determining investors risk

preferences. As the financial sectors of emerging economies develop and shocks continue, the wider impact of changes in

investor behavior will become increasingly important for policy makers and regulatory authorities. Studies of this kind are

particularly important in frontier or small emerging markets like Colombia because stock markets in the early stages of

development are the main beneficiaries of improvements in standards of ethics, transparency, and corporate governance.

Improvements in these areas foster public confidence and encourage investment. Our study also highlights the negative

impact a financial crisis can have on groups in which financial inclusion is of particular importance, such as women, the

self-employed, and young adults. A better understanding of the mechanisms underpinning changes in these individuals’liq-

uid allocation to risky funds may encourage more thoughtful policy decisions.

Several strands of literature are relevant to our work. The first seeks to connect lif e experiences with attitudes toward

risk. Malmendier and Nagel (2011) show that individuals experiencing a negative financial crisis when they first start to

invest, develop risk-averse attitudes later in life. Knüpfer, Rantapuska, and Sarvimäik (2016), studying the Finnish great

depression, reveal that workers with negative labor-market experiences are less likely to invest in risky assets. This strand

of the literature seeks to get to the heart of what drives individuals’risk preferences. The literature has already revealed that

demographic and socioeconomic factors (e.g., Booth & Nolen, 2012; Hryshko, Luengo-Prado, & Sorensen, 2011) and

genetics (e.g., Barnea, Cronqvist, & Siegel, 2010; Calvet & Sodini, 2013) also play an important role. The differences

between men and women in their sensitivity to the Interbolsa crisis is one of the key findings in our paper. Our results

build on an established literature showing heterogeneity in risk aversion across gender. Papers looking at actual investment

decisions (e.g., Jianakoplos & Bernasek, 1998), retirement savings plans (e.g., Sundén & Surette, 1998) and experimental

investment games (e.g., Borghans, Heckman, Golsteyn, & Meijers, 2010; Charness & Gneezy, 2012), have revealed greater

Received: 5 April 2018

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Accepted: 9 May 2018

DOI: 10.1002/rfe.1038

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© 2019 University of New Orleans wileyonlinelibrary.com/journal/rfe Rev Financ Econ. 2019;37:106–117.