Financial Literacy, Market Participation And Financial Well-Being

This paper systematically reviews the theoretical and empirical research on the household portfolio choice and bounded rationality, etc. In the analytical framework of the traditional family selection of assets, we innovatively put forward the view that investors are bounded rational, introduce the operational concept of bounded rationality-financial literacy, and rebuild the empirical analysis framework of the factors affecting the behavior of household portfolio composition and choice. Also, we firstly explore how the household financial market behaviors affect family financial wellbeing. In our empirical work, the latest micro-survey data about financial literacy, financial market participants and household financial well-being are used, which is from Financial Literacy Theory and Education Research Center of Southeast University (FINIT). Then a detailed study is conducted on how financial literacy influence market participation and the depth of participation in the financial products with different risk-return characteristics using IVprobit, Heckit treat effects and other econometric models. On this basis, we further investigate the empirical relationship between the family’s financial market behaviors and household financial well-being. In addition, we examined whether demographic characteristics, risk attitude, background risk, social interactions and other factors play an important role in household financial behavior and financial well-being. Finally, based on the principle that financial literacy is the basis for a reasonable investor’s financial decisions, we raised the importance and the specific practices on carrying out investors’ financial education and making financial literacy popular in quasi-public goods perspective.The main conclusions of this article are as follows:1. Firstly, using the Ⅳtobit and IVprobit models, this article empirically examines the effects of financial literacy on the behaviors and the depth of market participation in the risky financial markets, stock markets, bank financial markets and fund markets. The empirical results show that:(1) financial literacy contributes significantly to family involvement in the financial markets, and the higher level of financial literacy, the higher depth of market participation. (2) different financial products with different information density requires investors with different level of financial literacy. Also, the family investment behaviors on different financial products are affected by different levels of financial literacy. Specifically, the participation and configuring behaviors of risky financial market are influenced by both senior level of financial literacy and basic level of financial literacy; in the stock market, though configuring behaviors are still affected by the two level of financial literacy, the participation behavior is mainly affected by the senior level of financial literacy; because of financial products with lower risk and lower information density, investors’decisions of investment and configuration are only affected by the basic computing power and basic financial literacy; in the model of fund market participation and configuration, the endogeneity problem does not exist within the variable of financial literacy, thus the participation and configuring behavior of fund products are mainly influenced by senior level of financial literacy.In addition, we also find there is a significant characteristic of life cycle exists in family investment behavior in the stock and fund market; higher level of education promotes family participation and asset allocation in the financial markets; the wealth effect of the increased family income and increased value of financial assets promotes the possibility of family market involvements and the depth of involvements; investors with higher level of risk aversion will not involve in the risky financial markets and the stock markets, and reduce investment in such assets.2. Secondly, using Heckit treat effects model and OLS estimate modle, we further study the effects of participation in various financial markets on household financial well-being and the improvements of the depth of participation in a variety of financial assets on the financial well-being. Studies results have shown that:(1) Financial market participants have significantly enhanced the financial well-being of families, and family decision-making about involving in the financial markets exists the reverse selection bias. If not overcoming the endogenous selection bias, we will underestimate the effect of financial markets participation on financial well-being. (2) Financial products involvements with different risk-return characteristics bring different financial wellbeing. From the empirical findings, the promotion of financial wellbeing brought by involving in financial product markets is better than fund markets, similarly, the fund market is better than the stock market. (3) Except for the stock market, the higher depth of household participation in the financial markets, the higher improvement of the family’s financial well-being. With the increase depth of the participation, investors can properly utilize the financial markets to optimize the allocation of resources, which will make investors achieve their economic needs, and significantly improve their financial well-being. Considering market participants bring different improvement of financial well-being for people in different state of financial well-being, we use quantile regression model to study with the changes in the state of financial well-being what is the difference about how market participants influence the financial well-being. The results show that:(1) the main beneficiaries of participating in the risky financial market are people in the middle level of financial wellbeing, and the biggest beneficiaries of the stock market are people with high-level financial wellbeing. Moreover, participations in financial product market have broader range of beneficiaries, including low-level financial wellbeing people and high-level financial wellbeing groups, but beneficiaries are mainly low-level crowd. (2) the enhance of financial market participants on the financial well-being basically shows inverted U-shaped relationship, which means in the low level of financial well-being and with the upgrading of the financial well-being, financial market participants gradually upgrade financial wellbeing. Contrarily, in the high level, the promoting effect will decline.3. Finally, based on the empirical results, this paper explores the importance of carrying out financial literacy education and improving financial literacy of residents in the perspective of quasi-public goods. Also, this paper provides some practical recommendation for guidance on financial literacy education and improving household financial well-being.