Dmitrij Katkov


Global pension reforms and an ever-increasing sophistication of financial markets have led many households to take more personal responsibility for their own wealth accumulation and investment choices. Previous research has demonstrated that most of households worldwide do not invest in stocks despite the tenets of portfolio and lifecycle theories. This dissertation aims to explore one of the key explanations behind low levels of stockholding – a lack of financial literacy. Previous research has indicated that globally, most households lack financial literacy. The literature, however, has several shortcomings: a lack of a cohesive definition of financial literacy, the concept is operationalised inadequately, and many research papers have poor controls for endogeneity bias. To redress these shortcomings, this thesis takes a mixed methods approach. First, a comprehensive financial literacy test is developed and analysed using item response theory: the survey included 1554 respondents who are the customers of a large Swedish bank. The determinants of financial literacy were identified by a regression analysis, and the link between objective and self-reported financial literacies was explored. Instrumental variable probit regression was conducted to explore the effect of financial literacy on both direct and indirect stockholdings. Interviews with financial advisors were conducted in order to acquire more information on household motivation and how financial literacy is acquired. The findings suggest that there is an adequate level of financial literacy among the Swedish population, and there is a disconnect between objective financial literacy and a subjective one, thus rendering the latter a poor proxy. One’s level of financial literacy turned out to be a significant predictor of direct stockholding, but the effect was weaker for indirect stockholding. The financial literacy test developed here can be used in subsequent research and can include other financial instruments. The link between financial literacy and financial education and/or financial advice can be further explored.

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