Digital financial inclusion development, investment diversification, and household extreme portfolio risk

Abstract Most Chinese households are exposed to extreme portfolio risks; the findings show that digital financial inclusion significantly mitigates this phenomenon. Using a panel of nation‐wide data from the China Household Finance Survey, we find digital financial inclusion significantly reduces the probability of households taking extreme portfolio risks by promoting diversification. It also plays a greater role among households with low levels of wealth and financial literacy, located in areas where traditional finance has been slow to develop. These findings suggest that Internet‐based financial products are needed that are better suited to households with low levels of wealth and financial literacy.