The Impact of Economic Shocks on Financial Risk Tolerance Using Panel Data Analysis

Tingley, Howard David (2025) The Impact of Economic Shocks on Financial Risk Tolerance Using Panel Data Analysis. Doctoral thesis (PhD), Manchester Metropolitan University.

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Abstract

This study considered the effect of Gender and Marital Status on Financial Risk Tolerance (FRT), together with an in-depth analysis of generational differences, when interacting with crucial demographic characteristics during and outside the Russian Chinese Crises and the COVID-19 pandemic. For this empirical study, a linear regression ‘fixed panel effects’ model was used to analyse FinaMetrica investor data collated between 2012 and 2020. Four generational subgroups were created from a total of 47,466 completed FRT questionnaires. The theoretical framework used in this study was based on a synthesis of established theory including: Kahneman and Tversky’s (1979) Prospect Theory, incorporating Loss Aversion Bias, Myopic Loss Aversion (Thaler et al., 1997), the Life-Cycle Hypothesis (Modigliani, and Brumberg,1954), and Mannheim’s (1997) Theory of Generations. The results showed that, across all generations, single investors reacted negatively during the COVID-19 pandemic, but the Russian Chinese Crises had a positive effect. The findings presented new insight into how different generations react to exogenous shocks and the varying impact on FRT dependent on the root source of the crisis. For the Silent Generation, and Baby Boomers, it was found that investors reduced their FRT during the COVID-19 pandemic, but there was no significant change to FRT during the Russian Chinese Crises. However, within Generation Y (Millennials), it was found that Female investors responded negatively to the Russian Chinese Crises, but the COVID-19 pandemic had no significant effect. The findings contribute to the body of knowledge on FRT, providing helpful insights into generational behaviour and contributing to the FCA Consumer Duty Regulations. Although adding a layer of complexity for financial adviser’s when accessing their clients’ approach to FRT, those advisers will be more equipped to ask relevant questions and be aware that not all investors react the same way to economic shocks. Keywords: Generational risk, financial risk tolerance, COVID-19, Russian Crisis, Chinese Crisis, loss aversion.