Financial Literacy, Human Capital and Stock Market Participation in Europe: An Empirical Exercise under Endogenous Framework

Abstract

Households’ stock market participation has significant effects on savings and on an economy’s financial development and performance. Yet participation into capital markets is limited and quite heterogonous both among and within several countries. This phenomenon represents an empirical puzzle whose understanding is rather incomplete. In this work we exploit a combination of datasets for 9 European countries and use different econometric specifications that allow to control for endogeneity of financial literacy and human capital, to assess the role of several variables in affecting the probability to participate in the stock market in year 2010. Besides socio-demographic variables, we find that financial literacy has a positive and significant effect on stock market participation, together with the level of human capital. Country level differences are explained by such institutional factors as the effectiveness of the education system, captured by the student-teacher ratio, and by the attractiveness of the stock markets, proxied by the pattern of sharpe-ratios.