In June, Financial Literacy, Household Portfolio Choice and Investment Return, a paper co-authored by our school’s PhD student Li Qize under the Tilburg Program and Professors Li Jianjun and Wei Xu, was officially published in Pacific-Basin Finance Journal, an international journal on finance.
By drawing on the data of the Chinese Family Panel Studies for 2014, this paper looks into the relationship between financial literacy, household asset allocation and investment returns. It finds that growth in financial literacy will prompt Chinese households to participate in financial markets and increase their holdings of risky financial assets. One possible way of doing it is that rick financial knowledge helps people to understand financial markets, and reduce their costs of information search and processing during investment, thereby facilitating household investments.
Moreover, it also finds that financial literacy can increase households’ holdings of risky financial assets, but not the investment returns of all investors from financial markets. Specifically speaking, financial literacy can help young and well-educated investors obtain earnings, but lower the investment returns of elder and poorly-educated investors. One possible explanation for this is that possession of financial knowledge may also lead to excessive confidence, which results in too radical household investments and lower investment returns. Yet excessive confidence is more visibly shown in investors with relatively weak cognitive abilities.
In contrast with previous literature, this paper provides a more comprehensive and different approach to gauge financial literacy and household asset allocation, and looks into the relationship between financial literacy and household asset allocation, as well as the channels of relevant effects. In addition, it further finds that financial literacy not only has heterogeneous effects on investment returns of different households, which is a new perspective for studies on financial literacy and household asset allocation.
