Financial Literacy, Information Acquisition and Asset Pricing Implications

Ca' Foscari University of Venice Working Paper No. 03

40 Pages Posted: 6 Jun 2012 Last revised: 4 Dec 2012

See all articles by Yuri Pettinicchi

Yuri Pettinicchi

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA)

Date Written: May 1, 2012

Abstract

In this paper I study the information acquisition process in a simple asset pricing model with heterogeneous beliefs about future prices. This is instrumental to investigate the effects of financial literacy on market volatility. I posit that financial literacy affects the cost of acquiring information on the asset payoff and show that the effect on the market volatility is non-monotone and depends on the uncertainty of the fundamentals. I conclude that policies aimed at reducing the financial information acquisition cost increase price informativeness and, in a scenario with high uncertainty of the fundamentals, reduce the market volatility.

The main intuition is that lower information cost for the less literate households leads them to acquire more private information and to trade more actively. Having more private information revealed by the market price affects positively market volatility. On the other hand, with low uncertainty in the fundamental, the positive marginal effect is offset by the negative effect of having more traders with less precise beliefs.

Keywords: asset pricing, financial literacy, heterogeneous agents

JEL Classification: D82, G12

Suggested Citation

Pettinicchi, Yuri, Financial Literacy, Information Acquisition and Asset Pricing Implications (May 1, 2012). Ca' Foscari University of Venice Working Paper No. 03, Available at SSRN: https://ssrn.com/abstract=2078864 or http://dx.doi.org/10.2139/ssrn.2078864

Yuri Pettinicchi (Contact Author)

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

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