This research paper was written in winter 2019/20 within the Master's seminar Big Data in Personal Finance. In partial fulfillment of the requirements of the lecture, I analyzed the Survey of Consumer Finances 2016 with regards to the effect of financial literacy to stock market participation using R. Read the full paper here: Financial Literacy and Stock Market Participation: Evidence From the Survey of Consumer Finances.
The stockholding puzzle, pioneered in the research of Haliassos and Bertaut (1995), has gained a lot of attention by researchers. The question is why a large part of the population worldwide does not invest in stocks despite the equity premium and prefers to hold their assets in low-rate liquid assets (Haliassos & Bertaut, 1995, p. 1110). Due to the demographic shift in the population, this question has become more important in the last years. Stocks and their long-term wealth generating potential can help retirees to not be dependent on the struggling social security and pension systems (Christelis, Georgarakos, & Haliassos, 2011, p. 1918).
The contribution to the existing literature is that this paper analyzes the Survey of Consumer Finances (SCF) 2016 with regards to the effect of financial literacy to stock market participation. A new set of financial literacy questions was included in the SCF 2016 that makes it feasible to get an objective measure of financial literacy. This was not possible in earlier series of the SCF which resulted in financial literacy either not being included in the analysis [see, e.g. (Campell, 2006); (Haliassos & Bertaut, 1995); (Malmendier & Nagel, 2011)] or being included through proxies [see, e.g. (Christelis et al., 2011); (Huston et al., 2012); (Shum & Faig, 2006)]. While controlling for other effects, the measure of financial literacy used in this paper enables a more precise estimation of its effect on stock market participation.
In the descriptive analysis, I was able to show that there is a difference of stock market participation conditional on financial literacy. Also, financial literacy proxies used in previous research like education and wealth show structural differences in stock market participation when separated in financial literacy groups. More importantly, the Probit regression analysis confirms the results that financial literacy has indeed a significant effect in the decision to participate in the stock market. Therefore, I show that a lack of financial knowledge is a significant deterrent to stock ownership.