Can Financial Literacy Explain Lack of Investment in Risky Assets in Japan?

Naheed Rabbani,Yoshihiko Kadoya,Mostafa Saidur Rahim Khan

doi:10.3390/su132212616

Naheed Rabbani, Yoshihiko Kadoya + Show 1 more

Open Access

https://doi.org/10.3390/su132212616

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Journal: Sustainability	Publication Date: Nov 15, 2021
Citations: 8	License type: CC BY 4.0

Affiliation: University of Dhaka, Hiroshima University

Abstract

Although household savings in Japan are among the highest in the world, investment in risky assets is still very low. This study examines whether financial literacy explains the lack of investment in risky assets in Japan. We use data from the Preference Parameter Study, a nationwide survey in Japan that has been conducted by Osaka University. We use investment in stocks, investment trusts, futures/options, Japanese government bonds, government bonds of foreign countries, and foreign currency deposits as a proxy for investment in risky assets. Our results show that investment in risky assets is higher among financially literate people. Moreover, financial literacy has a significantly positive association with investment in risky assets even after controlling the demographic, socio-economic, and psychological factors. We check the robustness of the association between financial literacy and investment in risky assets by segregating investment in risky assets into investment in equity securities and investment in bonds and foreign currencies. Financial literacy is found to be associated with both investment in equity securities and investment in bonds and foreign currencies. Our results are also robust in terms of the endogeneity issue. The results imply that investment in risky assets in financial markets could be increased by introducing financial literacy programs at a mass level.

Highlights

The lack of investment in risky assets has been a long-standing puzzle in empirical finance
Yamori and Ueyama [12] investigated how financial literacy is associated with investment in equity securities; we extend the scope by incorporating other risky assets, such as Japanese government bonds, government bonds of foreign countries, and foreign currency deposits
We have provided evidence that financially literate people are more likely to invest in risky assets in the financial markets

Summary

Introduction

The lack of investment in risky assets has been a long-standing puzzle in empirical finance. Risky assets are generally associated with price volatility, and offer higher returns to investors. Risky assets comprise a significant portion of assets traded in the financial markets. Irrespective of the high capacity to generate returns, investment in risky assets across the world is quite low. Empirical evidence indicates that more than 50 percent of U.S households do not invest in stocks, while the participation of European households in the stock market is even lower [1,2,3]. The challenge of directing people’s savings in the financial market is confusing in Japan because it is traditionally found that people hold cash and place it in deposits, which generate little to no income

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