financial asset participation by cypriot households-ucy-m.sc. thesis prt-2004

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Financial Asset Participation by Cyprus Households

Focus on Stockholding

UCY THESIS PRESENTATION BY PANAYIOTIS TILLIROS

29/12/2004

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Contents

CySCF of 1999 and 2002– Aim of the Surveys and methodology

SPSS Cross Tabulation Results

Probit Model Regression Results

Conclusion

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CySCF of 1999 and 2002– Aim and Methodology (a)

The purpose of the Cyprus Survey of Consumer Finances is to build a household-level data base containing extensive information on the financial and real portfolios of Cypriot households, their labour market status and their attitudes towards saving, borrowing, risk taking, liquidity and other issues pertinent to financial behaviour and portfolio choice.

In this context, the survey provides a comprehensive source for a very broad range of the financial and non-financial assets and debts of Cyprus households.

Consequently, the CySCF is not only unique but constitutes pioneering work, placing Cyprus with very few other countries in the field, with similar statistical databases on household portfolios.

In fact, the CySCF constitutes a “microeconomic” approach to household economic behaviour, rather than a “macroeconomic” treatment of aggregate financial and real asset accounts in the form of assets and liabilities.

In the light of the above, such surveys are extremely useful, not only to professionals (in banking, insurance etc) and academics for analysing financial behaviour, but also to politicians and practitioners for policy making.

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CySCF of 1999 and 2002– Aim and Methodology (b)

The “macroeconomic” approach entails some methodological difficulties (mainly due to the lack of data)

Macro data do not disentangle changes in participation from changes in holdings conditional on participation (portfolio shares).

An advantage of the “microeconomic” approach is that it permits the researcher to pinpoint whether a change in the distributional shares of the various assets and liabilities is due to a change in household participation or arises from a change in the percentage share of a certain asset and liability, keeping household participation constant.

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Statistical & Econometric Analysisof CySCF Data

Table 1: Descriptive Statistics of Population Sample1999 2002

Mean, % Mean, %

Age, Years 46,5 48,7

Less than High School 35,4 37,3

High School 37,7 32,6

College 26,9 30,1

Married 88,4 87,8

Single 4,3 3,1

Male 65,0 60,9

Small HH=2-4 Members 66,7 68,2

Big Household >4 Members 27,9 24,6

One Income Household 34,6 29,9

Two Income Household 48,6 53,0

Three Income Household 9,5 8,9

Wage Earner 60,4 60,3

Self-Employed 17,6 24,3

Unemployed 2,0 1,5

Pension Receivers 13,8 11,3

Income, in C£ 14194 15109

Financial Assets, in C£ 14512 18254

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Table 1a: Descriptive Statistics of Population sample

The average age of the household head is 46,5 in the 1999 CySCF and 48,7 in the 2002 CySCF, compared to 54 in Italy and 51 in Holland, respectively.

About 88% are married in relation to 68% in Italy and 62% in Holland. Single people constitute 4,3% in the 1st survey and 3,1% in the 2nd, in

comparison to 19% and 15% in Italy and Holland respectively. The male population stood at 65% and 61% in the respective surveys. Education level; 27% or 30% by 2002 were university graduates, 38%

falling to 33% by 2002 finished high school, while 35% rising to 37% by 2002 possessed less than high school education.

The majority of the households, i.e. 67% rising to 68% by 2002 comprised two to four members, compared to 72% for Italy and 65% for Holland.

The distribution of households into one- two- and three-income families or more was around 35%, 49%, 10%. This changed to 30%, 53% and 9% by 2002. The corresponding distribution for Italy was 44%, 42%, 14% and for Holland 60%, 32%, 5%.

The mean Cypriot household income was £14.194 in 1999 or £15.109 in 2002 in comparison to £14.450 for Italy and £14.500 for Holland.

Table 2: Demographic characteristics of Stockholders and Non-stockholders, %

StocksLife

InsuranceRetirement

PlansStoc., Life Ins.,

Ret.Non

Participants

1999 2002 1999 2002 1999 2002 1999 20021999 2002

Age, Years 44,4 46,0 41,8 43,1 44,4 43,4 43,8 45,4 49,2 58,6

Less than High School 19,5 27,3 19,7 24,1 21,0 20,8 22,2 28,1 48,8 63,3

High School 37,5 32,7 45,3 29,8 44,2 36,2 42,3 34,7 33,0 25,5

College 43,0 40,0 35,0 46,1 34,8 42,9 35,5 37,2 18,2 11,2

Married 90,9 93,9 94,8 92,3 95,5 94,3 92,7 93,0 84,0 72,9

Male 70,8 67,6 64,9 64,6 83,4 66,2 68,7 64,2 61,3 54,9

Single 5,6 2,1 1,7 3,1 3,8 2,9 3,8 2,6 4,7 5,4

Small HH=2-4 Members 67,0 70,9 67,1 71,9 72,8 67,4 68,3 69,3 65,2 66,4

Big Household >4 Members 29,6 25,8 31,0 24,4 24,4 27,4 28,6 25,6 27,2 19,9

One Income Household 27,4 26,3 25,4 27,6 26,5 22,3 28,2 27,0 41,1 39,9

Two Income Household 55,2 57,5 62,6 57,0 56,9 61,6 55,4 56,7 41,6 43,6

Three Income Household 11,2 9,1 8,7 8,4 8,8 9,9 10,3 9,5 8,7 6,3

Wage Earner 64,7 63,9 71,1 60,0 82,2 69,0 68,9 63,1 51,8 53,2

Self-Employed 19,3 24,9 22,5 28,7 14,8 21,5 19,9 24,9 15,3 21,0

Unemployed 1,5 1,4 0,7 0,8 0,6 0,7 0,9 1,3 3,2 1,7

Retired 9,6 8,3 2,3 9,3 2,4 8,3 6,1 9,3 21,7 17,3

Income, in C£ 18550 16491 17884 19273 18179 18847 17145 16460 11205 11337

Financial Assets, in C£ 32785 27586 19584 22847 14809 20048 21244 22461 7691 8360

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Table 2a: Demographic characteristics of Stockholders and Non-stockholders, %

Direct participants in the stock market had an average age of 44,4(46 in 2002) years compared to 49,4 (58,6) years for the non-participants. In other words, participants were on average 5 yearsyounger in 1999 and 13 years in 2002

The percentage ratio of high school to university educated directparticipants (37,5/43 = 0,9:1) is lower than that of non-participants(33/18,2 = 1,8:1), bringing out the positive impact of education onparticipation. Similar results, even strengthening somewhat, comeout in relation to the 2002 survey, with the respective ratios being32,7/40 =0,8:1 and 25,5/11,2 = 2,3:1.

Further salient differences among direct participants and non-participants are that the former are more likely to be male at 70,8%(67,6% in 2002) compared to 61,3%, (54,9%) on average;overwhelmingly married (91% rising to 94% in 2002, in relation to84% and 73% respectively for non-participants) and rather belongto bigger households with more income earning members, as isconfirmed by intuition.

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Table 2b: Demographic characteristics of Stockholders and Non-stockholders, %

Being a wage-earner appears to play a role in theparticipation decision, since there is income ability andthe incentive of an expected higher return.

The main reason for the percentage of self-employedparticipants 19,3% (24,9%) prevailing over thecorresponding percentage for non participation 15,3%(21,0%) seems to be risk diversification, since the self-employed keep a large part of their wealth in their ownbusiness.

Of course, being unemployed and hence with lowincome does not encourage participation.

Naturally, stock investors have higher income andwealth than non-investors and this accords with intuition,theory and empirical findings.

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Table 2c: Demographic characteristics of Stockholders and Non-stockholders, %

The demographic and economic profile of indirect stock market participants through investment in life insurance is generally similar to that of direct stock participants, when contrasted to non-participants.

Nonetheless, those who invest indirectly through life insurance appear to be younger, aged 41,8 (43,1) on average compared to 44,4 (46) for direct stock participants.

In 2002, there is a notable jump by 7 and almost 6 percentage points in the number of the retired holding life insurance and pension accounts respectively.

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Table 2d: Demographic characteristics of Stockholders and Non-stockholders, %

This can be traced to the “Get-rich-quick” attitude that prevailed like mania at the time over the larger part of the population, including the retired, who often virtually “gambled” their retirement sums or lifetime savings on the Stock Exchange.

In fact, at the time, (according to a finding in the Central Bank / Cyprus College study) around 4%, out of a total of 190.000 households, placed large sums of money into single premium insurance investment plans (boosters) and subsequently lost heavily.

Furthermore, wealth for those who held retirement accounts remains lower in both survey years compared to direct stock participants and insurance policy holders, but higher than the wealth of non-participants .

Moreover, the respective percentages of those who held retirement accounts surpass those for non-participants regarding the educational level and income in both surveys. The above results accord with international experience.

Table 3: Participation in Stocks, Life Insurance and Retirement Plans by Age, %

<30 30-39 40-49 50-59 60-69 >70 Total

Stocks 1999 26,9 26,7 30,0 22,8 22,4 10,5 25,3

Stocks 2002 46,5 62,6 56,0 59,7 41,6 20,3 51,4

Life Insurance 1999 26,9 42,1 45,0 21,8 6,4 1,1 31,1

Life Insurance 2002 37,7 48,4 38,5 38,9 8,7 3,9 32,8

Retirement Plans 1999 8,7 15,1 13,5 14,0 11,2 0,0 12,5

Retirem. Plans excl. Prov. Funds 2002 12,3 10,2 14,6 15,1 1,3 0,0 10,3

Retirement Plans & Prov. Funds 2002 53,5 71,5 60,5 62,6 16,3 2,3 50,3

Stocks, Insur. & Retir. Plans 1999 47,1 56,7 63,9 45,0 36,0 12,5 50,3


Total HH by Age Group / Total HH 1999 7,6 24,7 28,9 22,6 9,2 7,0 100,0

Total HH by Age Group / Total HH 2002 9,5 20,6 25,9 19,9 14,6 9,5 100,0

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Table 3a: Participation in Stocks, Life Insurance and Retirement Plans by Age, %

An undeniable hump-shaped age pattern emerges, compatible with international experience

In the 1st survey, maximum direct participation occurs in the 40-49 age group, with 30% of the households directly participating in the stock market, compared to the average of 25,3%.

In 1999 total stockholding begins at a relatively low percentage in the youngest age group (less than thirty), and peaks at 63,9 at the 40-49 middle age group. Thereafter, a distinct fall is observed and disinvestment correlates with ageing.

Again in the 1st survey, indirect participation through life insurance also peaks in the 40-49 age group at 45%.

Furthermore, retirement plan participation peaks at the 30-39, rather than the 40-49 middle age group.

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Table 3b: Participation in Stocks, Life Insurance and Retirement Plans by Age, %

The 2nd survey still preserves the hump shape, with the distribution for both the direct and the indirect participation categories peaking in the 30-39 age group.

Thus, we observe a shift of the peak towards the younger 30-39 age group and away from the 40-49 group of the 1st survey.

Explanations for this accord with particular Cypriot cultural features, such as income support for the younger members of the family, which facilitated entry when the stock market fever was spreading.

Even though an age pattern appears in the statistical cross tabulations, both for Cyprus and the other countries considered, this result is not robust and is not confirmed by the Probit regressions.

Thus, age has an unclear and inconsistent effect, if any. It is highly probable that the income factor is hidden behind the middle age groups wherein stockholding and of course income peak.

Table 4: Participation in Stocks, Life Insurance and Retirement Plans by Education Level, %

< High School High School University Total

Stocks 1999 13,9 25,1 40,4 25,3

Stocks 2002 38,1 53,6 65,6 51,4

Life Insurance 1999 17,4 37,4 40,4 31,1

Life Insurance 2002 22,0 30,4 48,7 32,8

Retirement Plans 1999 7,5 14,6 16,1 12,5

Retirement Plans excl. Prov. Funds 2002 2,0 10,8 20,1 10,3

Retirement Plans & Prov. Funds 2002 28,5 55,2 71,9 50,3

Stocks, Insur. & Retir. Plans 1999 31,5 56,5 66,4 50,3

Stocks, Insur. & Retir. Plans 2002 55,4 78,7 90,3 73,5

Total HH by Education Level / Total HH 1999 35,4 37,7 26,9 100,0

Total HH by Education Level / Total HH 2002 37,3 32,6 30,1 100,0

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Table 4a: Participation in Stocks, Life Insurance and Retirement Plans by Education Level, %

Table 4 verifies the positive impact of education on stockholding: the higher the educational level the greater the direct participation in both surveys.

University degree holders surpassed those who did not go to high school only by a factor of 1,7 in 2002, rather than 3 as was the case in 1999.

Thus, we observe a notable shift in the educational composition of the stockholder pool between 1999 and 2002 towards households with less than high-school education and away from the other two education categories

This is attributable to the rapid spread of the equity culture and the Stock Exchange bubble of 1999, which lessened the impact exerted by education on participation.

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Table 4b: Participation in Stocks, Life Insurance and Retirement Plans by Education Level, %

The spread of the equity culture among Cyprus households was accomplished through the extensive media coverage and word of mouth, and was then reinforced by the establishment of investment companies promising hassle-free management of stock portfolios for the individual household.

This contrasted to the foreign experience where the equity culture spread via indirect stockholding through mutual funds

In principle, the existence of a significant mass of stockholders with limited financial education could cause market volatility, by inducing abrupt shocks to stock demand and supply in response to limited or misleading market signals.

In practice, a wide range of households (and their funds) seem to have been miserably entrapped in a static situation of complete lack of confidence, causing the current inactivity in the stock market.

Table 5: Participation in Stocks, Life Insurance and Retirement Plans by Income Quartile, %

1st YQuartile

2nd YQuartile

3rd YQuartile

4th YQuartile

Top Y5%

Top Y1%

Total

Stocks 1999 12,2 21,0 29,8 39,2 55,6 53,8 25,3

Stocks 2002 30,8 45,2 61,4 72,2 74,0 72,7 51,4

Life Insurance 1999 11,1 28,4 39,5 46,7 49,2 30,8 31,1

Life Insurance 2002 8,6 28,6 41,7 50,7 46,0 54,5 32,1


Retirement Plans excl. Prov. Funds 2002

1,4 3,3 10,2 26,4 29,4 9,1 10,3

Retirement Plans & Prov. Funds 2002 17,9 46,2 68,9 71,8 70,0 40,0 50,6



Total HH by Income Quartile / Total HH 1999

26,5 24,2 24,9 24,5 4,6 1,0 100,0

Total HH by Income Quartile / Total HH 2002

25,1 27,1 22,8 24,9 4,5 1,0 100,0

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Table 5a: Participation in Stocks, Life Insurance and Retirement Plans by Income Quartile, %

As regards the 1st survey, the first income quartile household participation, at almost half the mean participation (12,2/25,3=0,48) is high compared to Italy and Holland where it is almost non-existent.

This rises even higher in the 2nd survey (30,8/51,4=0,6). Again, this is attributed to the bubble incident which pushed many lower income households to put their savings and even borrow (as shown in the Central Bank / Cyprus College study) in order to enter the stock market.

This behaviour occurred in the expectation of a quick and high return, exhibiting irrational behaviour, not based on fundamentals and ignoring the constant cost of entry.

Also, in the 1999 survey, 23,6% of the population who belonged to the first income quartile (i.e. almost half the average total participation rate of 50,3%) participated directly and indirectly, while the respective figure for Italy is 1,5% and for Holland 4,4%.

In the 2002 survey, the respective percentage rises to 58% of the average total participation rate (42,7/73,7=0,58).

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Table 5b: Participation in Stocks, Life Insurance and Retirement Plans by Income Quartile, %

Consistent with theory and the international experience, direct and total participation rises in the second, third and fourth quartile of the income distribution in both surveys.

The rise continues concerning the top 5% of the income distribution except in the 2nd survey where total participation stabilizes at around 92% between the fourth quartile and the top 5% group.

As we move to the top 1% income bracket a drop off is observed, which is more prominent in terms of percentage points regarding total participation than direct participation.

The richest 1% of the population, feeling already rich enough does not probably see any need to increase further its wealth through stock market participation.

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Table 5c: Participation in Stocks, Life Insurance and Retirement Plans by Income Quartile, %

Similar behaviour is observed as regards the purchase of life insurance

In the 1999 survey, indirect participation through life insurance is higher than direct participation in all income quartiles except slightly for the first quartile.

This confirms that direct participation is more costly in terms of time and money and probably more troublesome than the indirect type.

However, this result completely reverses in the 2002 survey, as people were enticed by the initial public offerings of the investment companies and the opportunity for a quick profit, probably viewing insurance as a less profitable and longer term investment alternative.

Concerning the retirement plans including provident funds in the 2nd survey, a similar pattern emerges, except for a slight drop from the fourth quartile to the top 5% group and the drastic fall for the top percentile, which is consistent with intuition.

The retirement plans excluding provident funds in 2002, exhibit a similar pattern with those of 1999 with which they are comparable.

Table 6: Participation in Stocks, Life Insurance and Retirement Plans by Financial Wealth Quartile, %

1st FAQuartile

2nd FAQuartile

3rd FAQuartile

4th FAQuartil

Top FA5%

Top FA1%

Total

Stocks 1999 0,9 14,0 30,8 57,1 63,2 69,2 25,3

Stocks 2002 24,3 48,7 63,6 69,5 81,4 77,8 51,4

Life Insurance 1999 17,2 29,3 38,2 40,4 34,3 38,5 31,1

Life Insurance 2002 24,4 29,8 36,7 40,3 45,8 50,0 32,8


Retirement Plans excl. Prov. Funds 2002 5,3 10,9 14,3 10,7 10,2 0,0 10,3

Retirement Plans &. Prov. Funds 2002 41,7 53,1 55,8 50,7 39,0 66,7 50,3



Total HH by Financial Asset / Total HH 1999 25,2 26,8 23,1 24,9 4,9 0,9 100,0

Total HH by Financial Asset / Total HH 2002 25,1 25,4 24,6 24,9 4,9 0,8 100,0

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Table 6a: Participation in Stocks, Life Insurance and Retirement Plans by Financial Wealth Quartile, %

Regarding the participation decision according to financial wealththe results again confirm the theory and the internationalexperience: wealth is correlated with participation in the stockmarket.

Specifically, we observe participation rising as we move to higherlevels of the wealth distribution. This is evident in both surveyswhere the percentages of both direct and indirect stockholdingrise successively in line with wealth.

The slight fall for the top percentile of the rich regarding directstockholding in the 2002 survey is too negligible to detract fromsuch a strong finding.

The same evidence emerges concerning life insurance. The onlyexception to this pattern, which again is minor, concerns lifeinsurance for the top 5% and 1% of the wealthy in the 1999survey that show a fall of a few percentage points compared tothe fourth quartile.

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Table 6b: Participation in Stocks, Life Insurance and Retirement Plans by Financial Wealth Quartile, %

The retirement plans, when using the comparable definition,display a similar pattern in both surveys, with rising participationup to the 3rd wealth quartile, thereafter gradually falling to zero forthe top wealth percentile.

A completely different picture emerges when provident funds areadded.

This indicates that rich people in Cyprus do not care for ordinaryretirement plans but prefer provident fund schemes as a form ofwealth accumulation.

It is notable that the differences from the mean (12,5% and 50,3%in 1999 and 2002 respectively) are never that big across wealthquartiles, with the exception of the top wealth percentile, whichshows no preference for retirement plans at all in both surveysusing comparable data, while displaying a huge rise in itspreference for pension plans in 2002.

Table 7: Probit Model for Direct Stock Participationdirect stockholding dF/dx Std. Err. z P>|z|

age_30-39 .0578062 .0469506 1.27 0.206

age_40-49 .0248209 .0440982 0.57 0.570

age_50-59 .0181827 .0461311 0.40 0.690

age_60-69 -.0490154 .046285 -1.01 0.312

age_>70 -.1538079*** .0394789 -3.02 0,003

educ. high school .0703329** .0281063 2.54 0,011

educ. college .1999082*** .040101 5.15 0,000

male .063467*** .0227894 2.79 0,005

married .060593* .0323689 1.77 0.077

yearly dummy .6793551*** .1269395 3.99 0,000

ln_income -.0342922** .0173848 -1.96 0,05

ln_fin_assets .1532816*** .0094395 12.78 0,000

income_int_term .0408084** .0181687 2.23 0,026

fin_assets_int_term -.0969894*** .012148 -7.15 0,000

educ. col_int_term -.0267176 .0434933 -0.60 0.548

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Table 7a: Probit Model for Direct Stock Participation

A statistically significant yearly dummy confirms the expected bigjump in the intercept term, showing the upward shift in stockparticipation due to the market entry of various investmentcompanies following the 1999 survey, i.e. owing to supply sidefactors.

Being 70 years old or more reduces the probability of holdingstocks directly by 15 percentage points (at the 1% significancelevel) confirming the poor relationship between high age andparticipation.

Even though an age pattern appears in the statistical crosstabulations, both for Cyprus and for the other countriesconsidered, this result is not robust, as it is not confirmed by theProbit estimations.

As mentioned before, it is highly likely that the income factor liesbehind the middle age groups and this is the hidden explanatoryvariable that drives stockholding behaviour rather than age.

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Table 7b: Probit Model for Direct Stock Participation

Education also plays a significant role for participation in the StockExchange: having college or high school education raises theprobability of the household head holding stocks directly by 20 and7 percentage points at a 1% and 5% level of ss respectively.

Thus, the regression results confirm the statistical cross tabulationoutcome that education does indeed play a positive role forparticipation.

Indeed, there is theoretical justification for such an outcome:households with a higher educational level face lower incomeuncertainty and borrowing constraints, hence, they are more proneto investing in stocks.

Marriage and being male come out as statistically significantcharacteristics for direct stock market participation.

Wealth also has a positive marginal effect on direct stock participation, raising the probability of this event by more than 15 percentage points at a 1% level of ss.

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Table 7c: Probit Model for Direct Stock Participation

Income is also ss at a 5% level, but with a negative sign. By contrast, the income interaction term is ss again at a 5% level

with a positive sign, indicating that the influence of the income variable rose in 2002 with a net change of 4 percentage points.

In other words, income became more important for continuing stock market participation, since poorer income households tended to exit rather than remain in the market, following their rushed entry in the period 1999-2000 and the losses suffered with the unwinding of the bubble.

Nonetheless, adding the base year log income effect (minus 3.4 pp) to the net change recorded by the income interaction term (4 pp), indicates a positive overall income effect on direct stock participation of 0.6 percentage points.

By contrast, the sign of the wealth interaction term is negative,indicating that the effect on direct stockholding of a unit change inlog wealth decreased by almost 10 pp (at the 1% ss) in 2002compared to 1999.

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Table 7d: Probit Model for Direct Stock Participation

Hence, in 2002 wealth does not seem to be equally important forparticipation as it was in 1999. Specifically, adding the base year logwealth influence (15.3 pp) to the net change recorded by the wealthinteraction term (minus 9.7 pp) still indicates a positive total 2002 effect ondirect participation of 5.6 percentage points.

Hence, households with the same characteristics except financial wealthare differentiated to a lower extent in their participation behaviour in 2002relative to 1999.

The fact that wealth appears to play a less significant role in 2002 isattributed to the optimistic outlook prevailing in 1999 when more wealthyhouseholds tended to enter the market than poorer ones.

But, in 2002, when the situation turned sour and there was widespreaddisappointment with the Cyprus Stock Exchange, the differentiationacross wealth groups with respect to the poor declined, as evidenced bythe negative sign of the wealth interaction term.

The college education interaction term is not statistically significant, henceuniversity training did not exert a statistically different role across the twoyears covered by the surveys.

Table 8: Probit Model for Total Stock ParticipationTotal stockholding dF/dx Std. Err. z P>|z|

age_30-39 .0494089 .0483009 1.00 0.315

age_40-49 .042171 .0479049 0.87 0.384

age_50-59 -.0040942 .0509747 -0.08 0.936

age_60-69 -.2183176*** .0593748 -3.72 0,000

age_>70 -.4656634*** .0552749 -6.84 0,000

educ. high school .0997207*** .028106 3.47 0,001

educ. college .1893787*** .0342075 5.16 0,000

male .0808909*** .025605 3.16 0,002

married .1705269*** .0418073 4.17 0,000

yearly dummy .5704319*** .121924 3.66 0,000

ln_income .0416901** .0176938 2.36 0,018

ln_fin_assets .0501197*** .0055647 9.13 0,000

income_int_term -.0274982 .0189595 -1.45 0.147

fin_assets_int_term -.015375* .0084434 -1.82 0.068

educ. col_int_term .0514185 .054736 0.92 0.360

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Table 8a: Probit Model for Total Stock Participation

As predicted, the yearly dummy verifies the upward shift in stockparticipation found in the statistical cross tabulations (ss 1% level).

Indirect stock disinvestment begins to occur at the earlier age of 60with retirement, with a reduction in the probability of holding stocksindirectly by almost 22 pp, while at 70 this rises to almost 47 pp.

High school and college education remain strong explanatoryfactors for total stock participation, raising the probability of thisoutcome by around 10 and 19 pp respectively (ss 1% level).

The total stock participation probability for men rather than womenis even higher (at 8 pp, than in the case of direct stockholding (6pp).

Marriage also has a positive marginal effect on total stockparticipation, raising the probability of this event by 17 pp (ss 1%level).

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Table 8b: Probit Model for Total Stock Participation

This is a much stronger result than in the case of direct stockparticipation and should not be surprising, since indirectstockholding, being regarded as safer, comes with a promise ofraising the family welfare, in addition to the security of the livingstandard afforded by the insurance element.

Income and wealth raise the probability for participation by 4 and 5pp at a 5% and 1% levels of statistical significance respectively.

The wealth interaction term is the only one among the interactionterms used that appears marginally statistically significant (at the10% ss) with a negative sign, indicating that the effect on totalstockholding of a unit change in log financial assets decreased byaround 1,5 pp in 2002 compared to 1999.

This result, even though much weaker, is in the same direction asthe one obtained in the case of direct stockholding above, and,confirms the tendency for a lower differentiation across wealthgroups regarding household stock participation behaviour in 2002relative to 1999.

Table 9: Probit Model for Indirect Stock Participation via Life Insurance

Life insurance dF/dx Std. Err. z P>|z|

age_30-39 .0714234 .045387 1.62 0.106

age_40-49 .0548556 .0436534 1.28 0.201

age_50-59 -.0650156 .0413984 -1.51 0.131

age_60-69 -.2399731*** .028849 -5.60 0,000

age_>70 -.2878813*** .022921 -5.31 0,000

educ. high school .0438676 .028087 1.58 0.115

educ. college .0743976** .0375137 2.02 0,043

male .0100805 .0225653 0.45 0.655

married .0826473** .0337822 2.27 0,023

yearly dummy .8001287*** .1030993 4.63 0,000

ln_income .1067913*** .0208701 5.09 0,000

ln_fin_assets .0201301*** .0052114 3.85 0,000

income_int_term -.109323*** .0216292 -5.03 0,000

fin_assets_int_term .0087929 .0083621 1.05 0.293

educ. col_int_term .0879215* .0496521 1.84 0.066

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Table 9a: Probit Model for Indirect Stock Participation via Life Insurance

The only evident relationship between age and indirect participation through lifeinsurance concerns the age groups 60-69 and over 70, both of which display a lowerprobability for participating by 24 and 28,8 pp respectively (at the 1% level ss).

The coefficient signs for these age groups have come out negative, indicating thatthey are less likely to participate in any manner, either direct or indirect. Thisconfirms the intuitive reasons suggested previously: older people probably lack theknowledge and/or the education to go for insurance policies and most probablyperceive no such need, besides facing refusal by insurance companies.

Being married and having college education also prompts insurance purchase (at 5%level ss).

Moreover, the higher the wealth the higher (by 2 pp) appears to be the probability ofinsurance purchase (at the 1% level ss).

An even stronger probability association is revealed between rising income and theholding of insurance: the pertinent coefficient shows a marginal rise of 10,7 pp (atthe 1% level ss).

Linking this result with the theory presented in the literature review section, thecorrelation between income and investment insurance purchase is easilyrationalized: lower-income households are more likely to face borrowing or incomeconstraints and therefore cannot proceed with an optimal allocation of their life cycleearnings across periods. This renders insurance purchase perhaps an unnecessaryluxury and lower income households tend to prefer to invest in safer financial or realassets.

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Table 9b: Probit Model for Indirect Stock Participation via Life Insurance

The yearly dummy is also strongly statistically significant (at the 1% levelss) confirming the expected big jump in the intercept term.

The college education interaction term appears to be statisticallysignificant (at the 10% ss), indicating a net change in 2002 in theprobability of insurance purchase by almost 9 percentage pointscompared to 1999. This development corroborates the influence ofeducation on indirect participation.

The income interaction term turns out to be statistically significant (at the1% ss), with a negative sign, which implies a decrease in the probability ofinsurance purchase by 11 pp in 2002 compared to 1999.

Adding the base year log income influence (10,7 pp) to the net changerecorded by the income interaction term (minus 10,9 pp) indicates aslightly negative, close to zero total income 2002 effect on insurancepurchase, pointing to the corresponding decline in the influence of incomeon indirect stockholding via insurance

While in 1999 we observe a positive correlation between income andinsurance participation, this disappears in 2002. In other words, thedifferentiation across income groups with respect to indirect stock marketparticipation via insurance purchase is obliterated, as evidenced by thenegative sign of the income interaction term.

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Table 9c: Probit Model for Indirect Stock Participation via Life Insurance

This development is similar to the one observed above with regardto the decline of the effect of wealth concerning stockholding.

It seems that the collapse of the Stock Exchange, which causedthe insurance company investment funds to suffer great lossesprompted a general disappointment and households with higherincomes or available cash on hand, altered their investmentbehaviour, turning towards safer real assets in building their assetportfolios.

Evidently, the shock of the Stock Exchange collapse has exerted ahomogenising or harmonising influence on household financialbehaviour at least in some respects. Cypriot households nowseem to be making their portfolio choices with a longer horizon inmind (i.e. purchasing land, which is a rather illiquid but saferasset).

This was a natural and rather foreseeable development followingthe collapse of the Stock Exchange, since buying land andproperty is in the Cypriots’ mentality and goes back in the traditionof family economic culture.

Table 10: Probit Model for Indirect Stock Participation

via Retirement Accountsretirement_accounts dF/dx Std. Err. z P>|z| x-bar [ 95% C.I. ]

age_30-39 -.0291377 .0301011 -0.93 0.354 .267435 -.088135 .029859

age_40-49 -.0045253 .0316681 -0.14 0.887 .350515 -.066594 .057543

age_50-60 .009685 .0336547 0.29 0.771 .288053 -.056277 .075647

educ. high school .0625474*** .0247405 2.62 0,009 .379624 .014057 .111038

educ. college .0968702*** .031716 3.29 0,001 .340813 .034708 .159032

male .0935857*** .0160611 5.36 0,000 .614312 .062107 .125065

married .0462514 .0247401 1.62 0,105 .899939 -.002238 .094741

yearly dummy .1853592 .1847253 1.09 0.278 .420861 -.176696 .547414

ln_income .0332162** .0157518 2.10 0,036 922.566 .002343 .064089

ln_fin_assets .0017648 .0038282 0.46 0.645 797.385 -.005738 .009268

income_int_term -.028237* .0165963 -1.70 0,090 374022 -.060765 .004291

fin_assets_int_term .0047976 .0067485 0.71 0.478 347095 -.008429 .018024

educ. col_int_term .0739982* .0431042 1.92 0,055 .15282 -.010484 .158481

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Table 10a: Probit Model for Indirect Stock Participation via Retirement Accounts

In the case of the Probit model for indirect stock participation via retirement accounts,the sample has been adjusted, excluding household heads over the age of 60, sincethese people are already in retirement age.

High school and university graduates are around 6,3 and 9,7 pp respectively morelikely to hold retirement accounts (at a 1% ss).

Being male, rather than female raises the marginal probability of participation throughpension plans by about 9,4 pp (at a 1% ss). This, of course, is largely related to thediffering employment rate (Gainfully Employed Aged 15-64 / Population Aged 15-64),which was 78,8% for males and 60,2% for females in 2003.

None of the age groups up to the age of 60 record ss results, indicating that age isnot a significant characteristic for holding a retirement account.

Marriage, rather surprisingly, does not appear to play a role for pension fundparticipation even though this characteristic comes very close to being ss at the 10%level.

Income comes out as a significant explanatory variable, exerting a positive marginaleffect that raises retirement account participation by about 3,3 pp (at the 5% ss).

By contrast, financial wealth does not emerge as a significant factor, as the richerhouseholds are more likely to prefer and actually possess other investments to covertheir retirement age needs.

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Table 10b: Probit Model for Indirect Stock Participation via Retirement Accounts

The yearly dummy (the intercept term) is not statistically significanteither, since there was no notable shift in behaviour concerningpension plans between the 1st and 2nd survey. This result is alsoconfirmed in the statistical cross tabulations.

The college education interaction term indicates a net change, in2002, in the probability of holding a retirement account by 7,4 pp,(at the 10% ss).

On the contrary, the income interaction term records a netdecrease in 2002 in the probability of holding a retirement accountby around 2,8 pp, (at the 10% ss), compared to 1999.

This is a much weaker result than the corresponding one obtainedin the case of participation via insurance, but nevertheless, both thedirection and the explanations (relating to the decline of thedifferentiation across income groups) remain the same.

In any case, adding the base year log income effect (3,3 pp) to thenet change recorded by the income interaction term (minus 2,8 pp),indicates a still positive overall 2002 income effect on indirect stockparticipation through retirement accounts of half a pp.

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Conclusion (a)

The pertinent years turned out to be pivotal for the structure of household portfolios in Cyprus.

Perhaps the most striking difference between the two surveys lies in the enormous increase in stockholding.

The timing of the 1st survey coincided with a period of stock market euphoria that prompted a massive entry of households, raising participation to levels comparable to those of developed countries, which had a much smoother and longer transition into the era of the “equity culture”.

Thus, about a quarter of Cypriot households found themselves holding stocks directly, and half the households participating either directly or indirectly.

The 2nd survey captured the equally massive effect on participation exerted by the investment companies, which increased direct participation to over half the population and indirect to almost three quarters of the households.

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Conclusion (b)

The subsequent instability and collapse of the stock market confirmed the existence of a bubble and of stock mispricing way beyond justification by the fundamentals.

Cypriot households tend to have narrow financial portfolios with limited risk diversification.

Moreover, direct stockholders hold a limited number of stocks (42% in 1999 and 33% in 2002 held stock in only one company) and mostly have limited educational background.

Participation in direct stockholding is higher than in other countries in general and is unusually high for the very young.

This has been further exacerbated by 2002, when the direct stockholder base more than doubled relative to 1999 to exceed half the population of Cyprus.

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Conclusion (c)

Direct stockholding is observed across age groups, with the exception of those over seventy for whom the percentage diminishes drastically from the average.

Even though a hump-shaped age pattern appears in the statistical cross tabulations, both for Cyprus and the other countries considered, this result is not robust and is not confirmed by the Probit estimates. Thus, age plays an unclear and inconsistent role, if any.

It is highly probable that the income factor, through its correlation with age, is hidden behind the middle age groups wherein stockholding and of course income peak.

Education has also been shown to play a positive role both econometrically and through the relevant cross tabulation. The high participation rate of persons with less than high school education is notable and is attributed to the stock market frenzy, the family income support as well as the less stringent borrowing constraints due to bank policy.

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Conclusion (d)

Income and wealth have clearly emerged both statistically and econometrically as major factors for stock market participation and these accords both with theory and the international experience.

However, there has been a significant development between the 1st and 2nd survey: the econometric regressions indicate that in 2002, the differentiation across income and wealth groups with respect to stockholding behaviour has declined, on the whole, in comparison to 1999.

It is evident that the shock of the Stock Exchange collapse, following the 1999 bubble, has exerted a homogenising or harmonising influence on household financial behaviour, at least in some respects.

Marriage and being male constitute additional household characteristics that exert a positive effect on direct and total stock participation. This is not surprising, since stockholding comes with a promise of raising the family welfare in the longer term.

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Conclusion (e)

The analysis suggests that the typical portrait of the Cypriot Stock Exchange direct and indirect participant is that of a middle-aged (in his 40’s), married man, who tends to have higher education and relatively high income and wealth, belonging mostly to a household comprising up to four members, with two income-earning members in the family in the majority of cases.

In the light of the above, and provided we take account of the 1999 Stock Exchange bubble, it is concluded that Cypriot household attitudes and preferences regarding stockholding behaviour are consistent with mainstream theoretical predictions and the empirical findings based on international trends.

financial asset participation by cypriot households-ucy-m.sc. thesis prt-2004

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