Volatility Risk and Retail Investors’ Asset Allocation: Parallel Mediation by Exposure Limitation and Risk Tolerance

Abstract

Real-time trading platforms expose Indonesian retail investors to rapid price fluctuations, but how perceived volatility translates into implemented portfolios remains unclear. This study tests the association between Volatility Risk (VR) and Actual Asset Allocation (AA) and parallel mediation through Risk Exposure Limitation (RE) and Risk Tolerance (RT). A cross-sectional survey of 200 active Indonesian retail investors was analyzed with PLS-SEM. The model explains 56.0% of AA variance. VR is positively associated with RE (beta = 0.412, p < 0.001) and AA (beta = 0.378, p < 0.001), while RE is positively associated with AA (beta = 0.496, p < 0.001). The VR–RE–AA indirect effect is significant (beta = 0.204, bootstrap 95% CI [0.144, 0.265]), indicating complementary partial mediation. The RT-mediated path is unsupported. The conceptual contribution is the distinction between a supported rule-based exposure-control channel and an unsupported preference-based risk-tolerance channel, with implications for suitability assessment, brokerage safeguards, and financial advice.