Working Paper: CEPR ID: DP9556
Authors: Mario Padula; Yuri Pettinicchi
Abstract: Since the early 2000s, the importance of financial literacy for safe financial behaviors has increased in public debate and has been the motivation for several national and international institutions to launch and promote financial education initiatives. Although discussion on the effects of such education programs remains open, it is generally presumed that higher levels of financial literacy are associated with more stable financial markets. The present paper challenges this assumption and provides a model of heterogeneous agents which differ according to the level of their cognitive abilities. The model allows us to discuss the implications for asset pricing of policies aimed at increasing levels of financial literacy, and shows that general equilibrium effects cause market price volatility and the share of literate individuals to vary in a non-monotonic way with financial education.
Keywords: asset pricing; cognitive ability; financial literacy; heterogeneous agents; market stability
JEL Codes: D82; G12; G14; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing the effectiveness of financial education programs (G53) | Increases the level of financial literacy among individuals (G53) |
| Increases the level of financial literacy among individuals (G53) | Decreases the cost of acquiring financial information (G29) |
| Decreases the cost of acquiring financial information (G29) | Increases market price informativeness (G14) |
| Increases the level of financial literacy among individuals (G53) | Affects market stability (E44) |
| Increasing financial literacy (G53) | Decreases variance in market prices initially (G19) |
| Increasing financial literacy (G53) | Increases variance in market prices subsequently (G19) |
| As the share of literate individuals rises (I21) | Illiterate traders opt out of acquiring private information (D89) |
| Illiterate traders opt out of acquiring private information (D89) | Increases market volatility (G19) |