The Effect of Confucian Culture on Household Risky Asset Holdings : Using Categorical Principal Component Analysis

Confucianism, as an informal system, influences the risk preferences of households and, therefore, affects households' investment behaviours. This study investigates the effects of Confucian culture on household risky assets by using data from the 2016 China Family Panel Studies and using categorical principal component analysis. The empirical results reveal that Confucian culture is negatively correlated with risky assets held by households. Specifically, households more influenced by Confucian culture demonstrate a low probability of participating in the risky financial market and a decreased proportion of risky asset holdings. Further research indicates that this negative correlation is diminished in areas with high levels of social trust. Furthermore, foreign culture impact drives households to enter financial markets. Therefore, the Chinese government must thoroughly consider the potential effects of culture when formulating policies, utilize Confucian culture's adaptation to modern society and promote the healthy development of the financial market. This study augments the household finance theory from the perspective of informal systems and contributes to the research on ‘culture and finance.’