Financial Literacy, Shocks, and Portfolio Adjustments (Job market paper)

Abstract

I develop a life-cycle model of household portfolio decisions that accounts for heterogeneity in financial literacy and employ it to examine portfolio adjustments following household-level shocks. I use variation in unplanned births to parameterize the model and identify the margins of portfolio adjustments following household-level fertility shocks. Empirical evidence suggests that households increase the liquidity of their portfolios following such shocks. Using the model, I compare how households with different financial-literacy levels respond to similar shocks, and I show that higher financial literacy is associated with smoother portfolio adjustments following shock onset. All else equal, the more financially literate households appear less susceptible to the detrimental effects of liquidity constraints and the impact of portfolio-adjustment costs. The interaction between liquidity constraints and financial literacy plays a key role in the model, as it explains the differential speed and direction of portfolio adjustments observed in the data. Counterfactual exercises show that financial literacy mitigates the negative welfare effects of unexpected fertility shocks by at least 20%.

Sebastian Gomez-Cardona

PhD candidate in Economics

I am a Ph.D. candidate in economics at the Vancouver School of Economics of The University of British Columbia. My research interests are in household finance, macroeconomics and international finance.