Financial Literacy and Participation in the Derivatives Markets

Abstract

We set out in this study to determine whether individuals with higher levels of financial literacy are more likely to be active participants in the derivatives markets. Our empirical results, based upon an official National Survey undertaken by the Financial Supervisory Commission of Taiwan, reveal that even after controlling for stock market participation rates, financial literacy represents a significant benefit to individuals since it helps them to lower the entry barriers to purchasing complex derivatives products. We also find that household wealth, gender, residential location and diverse sources of information have significant effects on participation rates in the derivatives markets. Furthermore, when taking into consideration issues of accessibility or measurement error, the positive effects of financial literacy on derivatives market participation are found to remain largely unchanged.

Keywords: Household finance; Financial literacy; Derivatives market participation

JEL Classification: D8, E2, G1