The effect of financial knowledge on asset allocation for Chinese households

• Published date: 01 October 2024
• Author: Tsung‐Yu Yang,Pi‐Han Tsai,Tsun‐Feng Chiang
• Date: 01 October 2024
• DOI: http://doi.org/10.1111/1468-0106.12390

ORIGINAL ARTICLE

The effect of financial knowledge on

asset allocation for Chinese households

Tsung-Yu Yang

1

| Pi-Han Tsai

2

| Tsun-Feng Chiang

3

1

Center for Marine Affairs Studies,

National Kaohsiung University of Science

and Technology, Kaohsiung City, Taiwan

2

Department of Economics, Center for

Economic Research on Globalization,

National Tsing Hua University, Hsinchu,

Taiwan

3

Department of Applied Economics,

National Chiayi University, Chiayi City,

Taiwan

Correspondence

Tsun-Feng Chiang, Department of

Applied Economics, National Chiayi

University. Address: No.300 Syuefu Road,

Chiayi City 600355, Taiwan.

Email: tschiang@mail.ncyu.edu.tw

Abstract

This paper investigates the association and causality

between household financial knowledge and their

corresponding financial behaviours in financial

asset allocation and financial market participation. The

2014 data of the China Family Panel Studies (CFPS) is

used to examine the financial behaviours of Chinese

households. Our empirical results suggest that the level

of financial knowledge is positively correlated with the

number of various types of financial assets. Addition-

ally, by utilizing a multivariate probit model with

binary responses, allowing for pairwise correlations

among unobservable factors, it is found that household

heads with higher financial knowledge are more likely

to participate in certain financial markets, such as term

deposits, mutual funds and stocks. When using the

instrumental variable approach, it confirms that finan-

cial knowledge has some positive impacts on the num-

ber of assets and ownership of mutual funds and

stocks. We argue that financial knowledge can be a pre-

dictor of financial behaviour, but it has its limitation

for market participation. The removal of institutional

barriers and the improvement in information discourse

in China should also be implemented to help Chinese

households participate the financial market.

KEYWORDS

asset allocation, China, financial knowledge, multivariate

Probit

Received: 15 October 2019 Revised: 16 September 2021 Accepted: 25 March 2022

DOI: 10.1111/1468-0106.12390

442 ©2022 John Wiley & Sons Australia, Ltd Pac Econ Rev. 2024;29:442–468.wileyonlinelibrary.com/journal/paer

1|INTRODUCTION

Due to the introduction of new financial assets and the proliferation of financial instruments,

individuals' financial planning is heterogeneous in terms of the list of potential financial assets

(Christelis et al., 2010). Individuals must decide how to choose among different kinds of assets

and diversify their financial portfolios to meet their needs, and the ability to manage one's

financial assets requires a person to be well equipped with strong financial knowledge. It has

been well documented that financial market participation, that is, ownership of stocks and

mutual funds, and asset allocation are all highly correlated with financial knowledge. For exam-

ple, individuals with greater financial literacy are more likely to directly own stocks (Allgood &

Walstad, 2015), to have better plans for retirement (Lusardi & Mitchell, 2007a,2007b; Parker

et al., 2008) and to participate in the mutual fund market (Christelis et al., 2011). On the other

hand, a lack of financial knowledge is often associated with poorer and less active financial

decisions. Individuals with lower levels of financial knowledge naturally have fewer incentives

to participate in the stock market, bear higher borrowing cost (Chu et al., 2017; Georgarakos &

Inderst, 2011; van Rooij et al., 2011) and are less likely to plan for retirement and accumulate

wealth (Lusardi & Mitchell, 2007a). A lack of financial literacy is also positively associated with

lower allocation in financial assets (Guiso & Jappelli, 2008).

While financial knowledge is found to be correlated with one's choice of financial assets,

most researchers who have examined household-asset-allocation decisions have focused on the

stock and mutual funds markets (Bertaut, 1998; Christelis et al., 2011; Chu et al., 2017;

Georgarakos & Inderst, 2011; van Rooij et al., 2011). Only a small number of studies have con-

sidered bonds and futures.

1

Moreover, most of the previous literature has not considered the

possible correlations among different financial assets. Being in a financial market with multiple

financial assets available, individuals must first decide whether they want to distribute their

wealth in one or more types of financial assets, and then form portfolios. Thus, there may be

some factors common to all financial assets, such as asset-risk assessments, monitoring costs,

accessibility and individuals' preferences regarding portfolio diversification (Alessie et al., 2004;

Christelis et al., 2011), all of which influence individuals' choices when allocating financial

assets.

Compared with the current literature, which mainly focuses on developed financial mar-

kets, portfolio choice for households in developing financial markets has not received adequate

attention. Our paper aims to address this gap in the literature concerning financial

asset allocation and market participation of multiple assets in China to provide a greater under-

standing of how an individual's financial knowledge contributes to their choices. In our study,

we assume that individuals make ownership decisions for multiple financial assets simulta-

neously, considering the pairwise correlations among the unobservable factors of each asset

choice. By utilizing the household survey data from the China Family Panel Studies 2014 (CFPS

2014), which provides a special module that allows us to estimate individual financial knowl-

edge, we examine the potential contributions of financial knowledge to the degree of

asset allocation, in which six assets available for typical Chinese families are considered,

namely, term deposits, bonds, mutual funds, stocks, futures and houses.

2

To conduct this research, we first apply a multinomial logit model to analyse the relation-

ship between financial knowledge and the degree of asset allocation. The estimated results

show that the level of financial knowledge is positively correlated with asset allocation. That is,

household heads with greater financial knowledge tend to possess more different types of finan-

cial assets than those with less financial knowledge. Next, we examine the associations between

YANG, TSAI AND CHIANG 443