Portfolio Choice and Knowledge

Angelika Eymann ()
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Angelika Eymann: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 00-51, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: This paper investigates whether individual-specific costs and incentives to search for information on financial assets affect the individuals' willingness to hold risky and illiquid assets. The study presents a MIMIC model of asset holdings and financial knowledge that explicitly accounts for the endogeneity of financial knowledge and asset choice. Reducing various ill-measured proxy variables of the individuals' information status to one latent common factor denoted as 'financial knowledge', factor-analytic methods are employed to obtain a more reliable measure of the individuals' information status. The study introduces a two-sample simulated maximum likelihood estimator that uses matching techniques to overcome the respective deficiencies of two German savings surveys which contain partly overlapping information on individual asset holdings and socioeconomic characteristics. Monte Carlo simulation results confirm that this estimation technique allows to obtain unbiased estimates of the coefficients of predetermined and endogenous explanatory variables. The estimation results show that persons who have access to inexpensive financial information by means of vocational training, the expertise of family and friends, and technical equipment and the internet, are better informed about financial matters than others for whom financial information is costly. They are also most likely to hold 'complex assets', such as stocks and bonds and are particularly open to financial risk. The paper concludes that low-cost information campaigns, reinforced by social network effects, could be effective measures to permanently increase the willingness to hold risky assets among German households.

Pages: 61 pages
Note: Research in this paper is related to Sonderforschungsbereich 504 at University of Mannheim and the TMR research network
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