Financial asset choices in the aftermath of a crisis: evidence from India

Previous studies have shown that aggregate shocks shape households’ financial conditions and influence their investment behaviour. However, literature provides mixed evidence on the persistence of household investment behaviour in the aftermath of such shocks. This study utilizes a large panel household dataset from India to analyse the investment choices of households in the aftermath of a nationwide pandemic. Our findings indicate that households that experienced adverse impacts on their financial conditions during the crisis have a 2.2% points higher likelihood of investing in relatively safe assets compared to other households. Importantly, a similar preference for safer assets persists in the post-crisis period for such households. This persistence is primarily driven by households whose financial conditions did not improve in the post-crisis period. We also find that financially-strained households’ preference for safer assets is lower in regions that are better banked. Our baseline results are robust to alternate definitions of safe and risky assets, crisis intensity, financially-strained households, potential selection bias, and placebo tests. Our findings suggest that alleviating financial strain and enhancing access to banking services can mitigate risk-averse behaviour both during a crisis and in the subsequent period.