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Financial Literacy, Information Acquisition and Asset Pricing Implications

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  • Yuri Pettinicchi

    () (Department of Economics, University Of Venice C� Foscari)

Abstract

In this paper I study the information acquisition process in a simple asset pricing model with heterogeneous beliefs about future prices. This is instrumental to investigate the effects of financial literacy on market volatility. I posit that financial literacy affects the cost of acquiring information on the asset payoff and show that the effect on the market volatility is non-monotone and depends on the uncertainty of the fundamentals. I conclude that policies aimed at reducing the financial information acquisition cost increase price informativeness and, in a scenario with high uncertainty of the fundamentals, reduce the market volatility. The main intuition is that lower information cost for the less literate households leads them to acquire more private information and to trade more actively. Having more private information revealed by the market price affects positively market volatility. On the other hand, with low uncertainty in the fundamental, the positive marginal effect is offset by the negative effect of having more traders with less precise beliefs.

Suggested Citation

  • Yuri Pettinicchi, 2012. "Financial Literacy, Information Acquisition and Asset Pricing Implications," Working Papers 2012_03, Department of Economics, University of Venice "Ca' Foscari".
  • Handle: RePEc:ven:wpaper:2012_03
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    File Function: First version, 2012
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    References listed on IDEAS

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    1. Sudipto Bhattacharya, 2001. "Insider Trading, Investment, and Liquidity: A Welfare Analysis," Journal of Finance, American Finance Association, vol. 56(3), pages 1141-1156, June.
    2. Bernardo, Antonio E. & Judd, Kenneth L., 2000. "Asset market equilibrium with general tastes, returns, and informational asymmetries," Journal of Financial Markets, Elsevier, vol. 3(1), pages 17-43, February.
    3. Luigi Guiso & Michael Haliassos & Tullio Jappelli, 2003. "Household stockholding in Europe: where do we stand and where do we go?," Economic Policy, CEPR;CES;MSH, vol. 18(36), pages 123-170, April.
    4. Angela Hung & Andrew Parker & Joanne K. Yoong, 2009. "Defining and Measuring Financial Literacy," Working Papers 708, RAND Corporation.
    5. Christelis, Dimitris & Jappelli, Tullio & Padula, Mario, 2010. "Cognitive abilities and portfolio choice," European Economic Review, Elsevier, vol. 54(1), pages 18-38, January.
    6. Jappelli, Tullio & Padula, Mario, 2013. "Investment in financial literacy and saving decisions," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2779-2792.
    7. García, Diego & Vanden, Joel M., 2009. "Information acquisition and mutual funds," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1965-1995, September.
    8. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-1430, November.
    9. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-168, February.
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    Cited by:

    1. Mario Padula & Yuri Pettinicchi, 2013. "Providing Financial Education: A General Equilibrium Approach," CSEF Working Papers 334, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

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