Abstract

http://ssrn.com/abstract=1014994
 
 

References (43)



 
 

Citations (98)



 


 



Financial Literacy and Stock Market Participation


Maarten Van Rooij


De Nederlandsche Bank; Netspar

Annamaria Lusardi


The George Washington University School of Business; National Bureau of Economic Research (NBER)

Rob Alessie


Utrecht University - Utrecht University School of Economics; VU University Amsterdam - Department of Economics

September 2007

DNB Working Paper No. 146
Michigan Retirement Research Center Research Paper No. 2007-162

Abstract:     
Individuals are increasingly put in charge of their financial security after retirement. Moreover, the supply of complex financial products has increased considerably over the years. However, we still have little or no information about whether individuals have the financial knowledge and skills to navigate this new financial environment. To better understand financial literacy and its relation to financial decision-making, we have devised two special modules for the DNB Household Survey. We have designed questions to measure numeracy and basic knowledge related to the working of inflation and interest rates, as well as questions to measure more advanced financial knowledge related to financial market instruments (stocks, bonds, and mutual funds). We evaluate the importance of financial literacy by studying its relation to the stock market: Are more financially knowledgeable individuals more likely to hold stocks? To assess the direction of causality, we make use of questions measuring financial knowledge before investing in the stock market. We find that, while the understanding of basic economic concepts related to inflation and interest rate compounding is far from perfect, it outperforms the limited knowledge of stocks and bonds, the concept of risk diversification, and the working of financial markets. We also find that the measurement of financial literacy is very sensitive to the wording of survey questions. This provides additional evidence for limited financial knowledge. Finally, we report evidence of an independent effect of financial literacy on stock market participation: Those who have low financial literacy are significantly less likely to invest in stocks.

Number of Pages in PDF File: 48

Keywords: Portfolio choice, Knowledge of Economics and Finance, Financial Sophistication

JEL Classification: D91, G11, D80

working papers series


Download This Paper

Date posted: September 17, 2007  

Suggested Citation

Van Rooij, Maarten and Lusardi, Annamaria and Alessie, Rob, Financial Literacy and Stock Market Participation (September 2007). ; Michigan Retirement Research Center Research Paper No. 2007-162. Available at SSRN: http://ssrn.com/abstract=1014994 or http://dx.doi.org/10.2139/ssrn.1014994

Contact Information

Maarten Van Rooij (Contact Author)
De Nederlandsche Bank ( email )
P.O. Box 98
Amsterdam, 1000 AB
Netherlands
HOME PAGE: http://www.dnb.nl/dnb/home/research/researchers/personal_pages/en/47-150127.html

Netspar ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
Annamaria Lusardi
The George Washington University School of Business ( email )
School of Business and Public Management
Washington, DC 20052
United States
HOME PAGE: http://business.gwu.edu/faculty/annamaria_lusardi.cfm
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
R.J.M. (Rob) Alessie
Utrecht University - Utrecht University School of Economics ( email )
Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands
31 30 253 9814 (Phone)
31 30 253 7373 (Fax)
HOME PAGE: http://www2.econ.uu.nl/users/alessie/
VU University Amsterdam - Department of Economics ( email )
De Boelelaan 1105
1081 HV Amsterdam
Netherlands
+31 20 444 6047 (Phone)
+31 20 444 6005 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 2,413
Downloads: 710
Download Rank: 15,790
References:  43
Citations:  98
People who downloaded this paper also downloaded:
1. Financial Literacy and Financial Planning: Evidence from India
By Sumit Agarwal, Gene Amromin, ...

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.468 seconds