Risky Asset Holdings During Covid‐19 and their Distributional Impact: Evidence from Germany

• Published date: 01 June 2022
• Author: Lukas Menkhoff,Carsten Schröder
• Date: 01 June 2022
• DOI: http://doi.org/10.1111/roiw.12549

© 2021 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of

International Association for Research in Income and Wealth

497

RISKY ASSET HOLDINGS DURING COVID- 19 AND THEIR

DISTRIBUTIONAL IMPACT: EVIDENCE FROM GERMANY

by Lukas Menkhoff

Humboldt- Universität zu Berlin

DIW Berlin (German Institute for Economic Research)

Carsten sChröder*

DIW Berlin (German Institute for Economic Research)

Freie Universität Berlin

We present evidence from a repeated survey on risky asset holdings carried out on a representative sam-

ple of the German population six times between April and June 2020. Given the size of the Covid- 19

shock, we find little evidence of portfolio rebalancing in April 2020. In May, however, individual inves-

tors started buying heavily, parallel to market recovery. The cross- section shows large differences as

young, educated, high income, and risk tolerant investors are net buyers throughout and, thus, benefit

from the stock market recovery. Older individuals, parents of young children, and individuals affected

by adverse liquidity shocks from Covid- 19 are net sellers. Given the high risk of illness, older people are

hit by dual blows to both health and finances.

JEL Codes: D31, G50, H31

Keywords: risky assets, distributional effects, individual investment behavior, health and income shocks,

expected adverse shocks

1. IntroduCtIon

The Covid- 19 crisis in early 2020 sent a shockwave to the global economy,

rocking financial markets. In February and March of 2020, stock markets fell

by more than 30 percent, the strongest decline in history over such a short time

period (see Baker et al., 2020a). Thereafter, surprising for many, stock markets

and other risky assets quickly recovered within the next few months. Standard

portfolio theory predicts that rational investors react to such large price changes

in risky assets by rebalancing their portfolios, buying in declining markets and

selling during recovery (e.g., Calvet et al., 2009a). However, increased risk and

uncertainty during a crisis may also lead to the opposite pattern, selling first

and buying later when uncertainty declines (e.g., Fagereng et al., 2018; Altig

Note: We appreciate valuable comments from Johannes König, Manuel Menkhoff, Steffen Meyer,

Doris Neuberger, and Ulrich Schmidt. We also thank our editor Prasada Rao and an anonymous re-

viewer for many valuable comments. Financial support from the German Federal Ministry of Education

and Research to conduct the SOEP- CoV survey is gratefully acknowledged. Carsten Schröder acknowl-

edges funding from the German Research Foundation (SCHR 1498/7- 1).

*Correspondence to: Carsten Schröder, Freie Universität Berlin, 10108 Berlin, Germany (cschro-

eder@diw.de).

Review of Income and Wealth

Series 68, Number 2, June 2022

DOI: 10.1111/roiw.12549

This is an open access article under the terms of the Creative Commons Attribution- NonCommercial-

NoDerivs License, which permits use and distribution in any medium, provided the original work is

properly cited, the use is non- commercial and no modifications or adaptations are made.

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Review of Income and Wealth, Series 68, Number 2, June 2022

498

© 2021 The Authors. Review of Income and Wealth published by John Wiley & Sons Ltd on behalf of

International Association for Research in Income and Wealth

et al., 2020). Regardless, rebalancing decisions provide enormous potential for

gains and losses during a period like this, with considerable impacts on the

distribution of income and wealth. How did investors behave overall during

this turbulent period? Did they rebalance their portfolio structures, and did

they buy or sell risky assets? How did specific groups behave? What impacts did

their behavior have on the wealth distribution, and what are the implications

for policy?

In order to answer these questions, we used data from SOEP- CoV, a repeated

cross- sectional survey of a representative sample of the adult German popula-

tion conducted as part of the German Socio- Economic Panel (SOEP) study. The

SOEP- CoV database consists of six survey waves conducted between April and

the middle of June, 2020 on investing behavior in risky financial assets (to which

we refer in the following simply as risky assets). The data provide us with relatively

high- frequency, but still representative, information on a very turbulent period

(with a sharp drop and a quick recovery in stock markets and other risky assets).

This combination is unique, to the best of our knowledge, and allows for analy-

sis of the dynamic behavior of an entire population of individuals holding risky

(financial) assets (in contrast to bank- specific data).

Overall, we find that individual investors react very little in the beginning

but begin buying heavily thereafter, with a high degree of heterogeneity and with

adverse distributional effects. Specifically, we obtain five results. First, there is a

large degree of inaction, with just up to 10 percent (increasing from 6.4 to 10.6)

of individuals who hold risky assets rebalancing their portfolios during the first

months of the Covid- 19 crisis, that is, from April to early May 2020. Second, net

buying of risky assets gains momentum continuously over our sample period (up

to 25 percent rebalancing in the last wave). Third, rebalancing as well as buying

behavior is much more prevalent among “informed” investors, who benefit from

the recovery on the stock market. These individuals are younger, better educated,

higher in net income, and higher in risk tolerance. The net sellers during rising mar-

kets are older, have children at home, or have been affected by crisis- related liquid-

ity shocks. Within the group of net sellers, older people are hit by dual impacts of

the pandemic: first by the financial effects, and second by the higher risk of severe

illness. Fourth, these results suggest that the impact of the Covid- 19 shock on risky

asset holdings has clear distributional consequences that affect some household

groups in particular. While higher- income net buyers benefit from the crisis, net

sellers are unable to profit fully from the recovery of risky asset prices. As a result,

the financial market dynamics widen the wealth gap between these groups. This

result is related to the literature showing that return heterogeneity increases wealth

inequality due to the prevalence of undiversified portfolios (see Campbell et al.,

2019, and, indirectly related to Covid- 19, Hanspal et al., 2021). Fifth, our results

present a contrast to results from studies based on different samples: individual

investors in Germany rebalance less than those in the United States (see Hanspal

et al., 2021) and they also trade less than customers of a discount broker (Ortmann

et al., 2020).

It follows that our results cannot be generalized across all countries. The more

reluctant trading behavior of German relative to US investors may be influenced

by low stock market participation in Germany and the small share of risky assets