An Empirical Study On The Factors Affecting Individual Investors’ Risk Tolerance In Chinese Stock Market

The securities market in our China has had a developmental history of more thantwenty years since the1990s. But compared with the securities market in developedcountries, China’s securities market is still an emerging market, whose mechanism andsystem is less perfect, and its investment theory has not yet been mature.The investor in the stock market can be divided into two categories, one isinstitutional investor, and the other is ordinary investors. Institutional investors have alot of advantages in financial strength, technical means and information acquisition andmastery while the latter, because of their weakness, makes decisions on the basis ofconjectures and inquiring about the former’s news or dynamics. In China stock market,small investors account for the vast majority of the investors, whose decision-makingbehavior to a great extent determines the development of the market. However, they arevulnerable groups in this match and their decisions directly lead to the instabilities inthe stock market.Those apparent non-efficient markets in China, there are controversies about howmuch traditional finance based on the assumption of "rational man" can explain stockmarket with Chinese characteristics. The behavioral theory in finance, to some extent letus have a better understanding about China’s securities market, and it provides a uniqueresearch angle and a powerful research tool. From the viewpoint of the investors whoare the main point in the market, we can successfully explore the formation of price inthe market and there is no doubt that it is more meaningful than a series of theoreticalderivations.Investors’ risk tolerance, as an important part in the theory of behavioral finance, isthe intrinsic driving force for them to make investment targets and decisions, and has agreat influence on the investor behaviors.There are a greater heterogeneity between China’s securities market and those inthe Western developed countries, so there are greater diversities between the factors that affect the western investor’s behavior and that in China, some Western risk tolerancetheory and tested results may not be applicable to our investment markets, so it isnecessary that we have a full analysis of these factors.The research into the investors’ risk tolerance ability and the factors about it canpractically help investors choose their own suitable investment products and allocate theresources reasonably to achieve the investment objective. Also it’s conducive for theinvestment managers to educating investors, helping clients set investment strategiesand introducing suitable investment products to its customers. Theoretically, it canperfect the related theories in behavioral finance and provide references for researchersto explain the anomalies in the market in the field of behavioral finance.The studies on risk tolerance ability have been focusing on the demographiccharacteristics, which can judge whether and how much the ability is influenced bythese characteristics. However, they did not reach an agreement on the factors affectingon those abilities. A plenty of researches even make the opposite conclusions. For thesake of the significance of investors’ risk tolerance on protecting the small investors inthe securities market, the thesis explores the inner structure of the risk-bearing capacitythrough the factors affecting it to provide reasonable and reliable explanations aboutthose contradictory conclusions.Based on a questionnaire and through frequency analysis by cross reference table,chi-square test, optimal scaling regression model in this thesis, we have a deeperexploration to analyze those factors which affect investors’ risk tolerance and make aconclusion that demographic characteristics are the factors that just have an impact oninvestor risk tolerance factors indirectly and could only explain a small amount ofinvestor risk tolerance. The investors’ risk appetite, family burden, education andknowledge concerning investment are the main factors affecting investors’ risktolerance capacity and it can explain68.1%of it.Based on the conclusions of the survey, this paper presents a model of the internalstructure of the investors risk tolerance: investors’ risk tolerance capacity mainly consists of three elements: risk awareness, risk preference as well as personal margin ofsafety. The investors with a higher risk appetite tend to set a higher margin of safety andit can follow a high security boundary, at the same time the investors with a higherdegree of risk awareness will set a higher margin of safety, while the investors’ risktolerance capacity not only emphasizes their subjective preferences but we should takeobjective abilities into account, of which risk perception is mainly restricted by the levelof education and the age of shares while the risk appetite is mainly influenced by thecharacters, age, gender, heredity and living environment, security boundary is relatedwith the income, family burden, career and health and so on.With this theory, we try to explain the doubts of previous studies about the factorsaffecting risk tolerance capacity and consider that age is a comprehensive variable,excluding the linkage influences of other factors, age and risk tolerance capacity existnegative correlation. The change in age are often accompanied with that in income andinvestment knowledge, and therefore contradict conclusions appear.Also it proposes interactions between occupation and risk tolerance capacity.Because of different risk preferences, people will choose different professions, whichwill affect the income and other variables at the same time. Therefore, it is notprofession that impacts risk tolerance capacity but they interact in different ways.