Financial Literacy And Household Portfolio Allocation

With the rapid development of financial markets and the constantly increasing household disposable income, households are looking forward to participating in financial markets in order to achieve wealth appreciation. Under this background, a large number of domestic and foreign scholars have devoted themselves to working on household asset allocation problems.Firstly, this paper combs relevant theories and literature on household asset allocation behaviors. On the basis of this, we summarize the factors that may affect household asset allocation behaviors, including age, education, marital status, sex, household wealth, income, real estate, entrepreneurial risk, social interaction, location, the level of financial development, the level of economic development. Secondly, through theoretical analysis and modeling, we confirm that financial literacy affects the excess return and the cost of financial market participation, which means financial literacy could have a significant impact on household assets choice behaviors. Therefore, we add one more variable, financial literacy, in the model.Next, we use the survey data for the micro-Chinese families by China Household Financial Survey and Research Center (CHFS) in 2011 for the empirical study. We propose a factor score composed of four questions that can serve as a proxy of financial literacy to correct an important omitted variable bias.Relying on Probit, Tobit and multiple linear regression models, we show how controlling for financial literacy provides a more precise estimate of the marginal effects of traditional variables on household portfolio allocation behaviors.The empirical results show that there is a significant positive correlation between financial literacy and household financial market participation probabilities, household financial assets proportions and wealth accumulation. Specifically, more financial literacy households are equipped with, more likely households participate in risky financial asset investments, more fortune households invest in risky assets, more wealth households accumulate.Finally, we provide some suggestions for governments, households, financial institutions on the basis of empirical results.