Muhammad Hussnain (237-BAF-BH-14)

Faizan Shamoon (252-BAF-BH-14)

Gender stock market participation and

Financial literacy

Literature review:
Stock market participation is an important economic outcome. There can
be a substantial welfare loss from not participating in the stock market,
as exposure to equities, and hence to the equity premium, may be an
important determinant of the long-run return to individual savings
(Cocco et al. 2005). Investing in the stock market provides an opportunity
to take advantage of the equity premium and to benefit from risk
diversification. In fact, evidence on the composition of household
portfolios across countries shows that many households have no stocks
at all in their portfolios (Guiso, Haliassos and Jappelli, et al. 2002).
Yet, there is substantial variation in stock market participation between
individuals, with many households not holding any stocks at all
(Campbell 2006, Guiso et al. 2008). Financial literacy and retirement
planning, difficulties in performing calculations and low financial
sophistication affect also the ability to plan for retirement (Maarten van
Rooij et al. 2007). The evidence on financial literacy across countries and
show that financial illiteracy is a common feature in many other
developed countries (Lusardi and Mitchell et al. 2007b). Moreover, we
will assess whether financial literacy has an effect not only on portfolio
choice but also on saving behavior and whether those who display low
literacy are less likely to accumulate wealth (Maarten van Rooij et al.
2007). Basic financial literacy is not correlated with risk preferences
whereas advanced financial literacy is. However, the gender gap remains
significant even when we control for financial literacy. This result matters
because attitude toward risk taking is an important determinant of stock
market participation and other important decisions in a number of
domains. Moreover, this contributes to the understanding of the often-
observed gender gap in risk preferences (Croson and Gneezy et al. 2009).
Basic financial literacy is likely to be exogenous to stock market
participation for most individuals. We find that controlling for basic
financial literacy reduces the gender gap in stock market participation.
The effect is robust to including a separate control for advanced financial
literacy. When it comes to risk attitudes, the gender gap remains
significant when controlling for financial literacy (Johan et al. 2011).