The effect of financial knowledge on asset allocation for Chinese households

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. Additionally, 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 financial knowledge has some positive impacts on the number of assets and ownership of mutual funds and stocks. We argue that financial knowledge can be a predictor 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.