Wealth Shock and Impact of Health on Risk Aversion and Savings

Abstract

In the bear market of 1999-02 many investors lost large proportions of their life-time savings invested in equity. Indeed, total returns on the FTSE All Share index declined by 37 per cent by the end of year 2002, while the S&P 500 declined by 38 per cent. The impact was magnified by falling bond yields in both Europe and North America. The decline in bond yields meant older individuals were faced with lower annuity rates for their pensions and lower returns on similar safe instruments such as fixed-term bonds. This paper models the relationship between risk aversion, status of health and changes in savings among older individuals in the UK. Using responses to a unique questionnaire, we show how these factors are correlated with the decline in total savings after the markets crashed in 2000.

Keywords: Health, Risk Aversion, Savings