Individual Investors’ Financial Literacy And Its Market Impact

Financial literacy is a crucial factor for individuals to make rational financial decisions,and it has an important impact on the financial situation of the individuals and the economic benefits of the entire society.Researches have been widely carried out on the individual level,establishing a strong connection between financial literacy and investor behavior from a micro perspective.However,due to the limitation of the collection methods,it is difficult to measure the investors’ financial literacy on a large scale,and to explore and expand the related researches on the company level.The widespread use of the Internet and the advent of the era of big data have made a breakthrough for in-depth research on financial literacy.The Internet records the postings and comments of investors on financial-related blogs,forums and other social media.The words and texts of investors can reflect their own financial literacy,allowing us to achieve large-scale collection and measurement of financial literacy.Therefore,we propose a new financial literacy measurement method and construct indicators based on the textual analysis and investors’ words and texts on financial social media platform,and conduct research from the company level to study the relationship between financial literacy and investors’ behavior,as well as the impact on individuals and the market.Specifically,we carry on the researches as follows.The first part of our research is constructing financial literacy indicators for individuals and investor groups based on text analysis,and performing validation tests on the new indicators.We first build a dictionary of professional financial words with the help of the machine learning algorithm word2 vec.Furthermore,we collect financial social media text data of investors,extract professional financial vocabularies from the text data,and use the word-frequency-based method to construct financial literacy indicators based on these professional financial vocabularies.Finally,we test the distinction,accuracy and applicability of the new indicators,and prove that the new method and the new indicators can effectively measure the investors’ financial literacy.The second part studies the relationship between financial literacy and the choice of stock assets.This expands the link between financial literacy and asset selection from micro to meso,making the theoretical relationship between financial literacy and asset selection clearer.The investigation focuses on how financial literacy affects investors’ stock selection ability.It is found that investors with higher financial literacy have stronger stock selection capabilities.They can find stocks with higher future abnormal returns and stocks that are undervalued.Based on the findings,we use the investor groups’ financial literacy to construct quantitative investment strategies and analyze the profitability of the strategies.It shows that the strategies following the choice of high financial literacy investors can obtain significant investment returns statistically and economically.The third part concentrates on the influence channels of financial literacy on asset price.This can be regarded as a preliminary exploration of the relevant laws of influence of financial literacy on variables at the company or market level.We add investor financial literacy to the analysis of the impact of irrational trading behavior on stocks price,and study the impact of interaction between investor financial literacy and trading behavior biases on stocks price.We find that financial literacy has a significant impact on stock price by weakening the effect of irrational behavior.In summary,we provide a new method for large-scale measurement of investors’ financial literacy,which is a strong complement to the traditional measure of financial literacy.We also conduct empirical researches on the relationship between financial literacy and investor behavior on the company level.These are supplement and expansion to the existing literature,which helps deepen the understanding of the existing theories.From a practical perspective,the new method we propose will help the regulatory authorities to monitor the dynamic changes in the financial literacy of market investors timely and accurately,and help the financial industry to have a deeper understanding of investor trading behavior biases and the performance of stock price under the influence of financial literacy.