Financial Literacy and Informativeness of the MiFID Tests
(2017)
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- Abstract
- Since November 2007, investment firms operating in the EU are forced to submit the MiFID tests to their clients in order to determine their level of knowledge of financial markets and their experience in complex instruments. Since such tests require investors to report perceptions and individual preferences, it is worth addressing to what extent statements made by retail investors are trustworthy and in line with their actual trading behavior. Focusing on financial literacy, we show that the level of self-reported financial literacy in the MiFID tests helps explain cross-sectional variations in retail investors' behavior. Investors who report a high level of financial literacy seem to be more familiar with financial markets, even after controlling for gender, age, portfolio value, trading experience and education. They are more active traders on stocks and complex instruments. They trade a larger universe of stocks and are more prone to invest in fund shares. They also tend to display higher returns. Our findings are relevant for regulators as well as for investment firms in their effort to deliver the most suitable services to their clients.
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Citations
Bellofatto, A., D’Hondt, C., & De Winne, R. (2017). Financial Literacy and Informativeness of the MiFID Tests. https://hdl.handle.net/2078.5/178436