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on Financial Literacy and Education |
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Issue of 2017‒12‒03
two papers chosen by |
| By: | Bhamra, Harjoat Singh; Uppal, Raman |
| Abstract: | Households with familiarity biases tilt their portfolios toward a few risky assets. Consequently, household portfolios are underdiversified and excessively volatile. To understand the implications of underdiversification for social welfare, we solve in closed form a model of a stochastic, dynamic, general-equilibrium economy with a large number of heterogeneous firms and households that bias their investments toward a few familiar assets. We find that the direct mean-variance loss from holding an underdiversified portfolio that is excessively risky is equivalent to a reduction of 1.66% per annum in a household's portfolio return, consistent with the estimate in Calvet, Campbell, and Sodini(2007). However, we show that in a more general model with intertemporal consumption, underdiversified portfolios increase consumption-growth volatility, amplifying the mean-variance losses by a factor of four. Moreover, in general equilibrium where growth is endogenous, underdiversified portfolios distort also aggregate investment and growth even when familiarity biases in portfolios cancel out across households. We find that the overall social welfare loss is about six times as large as the direct mean-variance loss. Our results illustrate that financial markets are not a mere sideshow to the real economy and that financial literacy, regulation, and innovation that improve the financial decisions of households can have a significant positive impact on social welfare. |
| Keywords: | familiarity bias; growth; Portfolio choice; social welfare; underdiversification |
| JEL: | E44 G02 G11 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12414&r=fle |
| By: | Gourène, Grakolet Arnold Zamereith; Mendy, Pierre |
| Abstract: | This paper examines the causal relationship between Financial Inclusion and economic growth in the West African Economic and Monetary Union (WAEMU) from 2006 to 2015. We combined the heterogeneity panel causality test proposed by Dimitrescu and Hurlin (2012) with the Maximal Overlap Discrete Wavelet Transform (MODWT) to analyze the bi-directional causality at different time scales. We used two Financial Inclusion indicators: the overall rate of demographic penetration of financial services and the overall rate of use of financial services. Our results show that at scale 1 (2-4 years), there is no causality between economic growth and Financial Inclusion indicators. However, at scale 2 (4-8 years), we found a bi-directional causality between economic growth and Financial Inclusion. Policymakers should, therefore, while promoting Financial Inclusion reforms that are beneficial to Financial Inclusion, make more efficient the levers favoring macroeconomic growth, which also seems to be a decisive factor of Financial Inclusion. |
| Keywords: | Financial Inclusion, Economic Growth, Time Scales, Heterogeneity Panel Causality, MODWT. |
| JEL: | C00 G2 O1 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:82251&r=fle |