Impact of Stock Market Knowledge on the Trading Behavior

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Impact of Stock Market Knowledge on the Trading Behavior: Experimental Evidence from a Developing Country Presenter: Kazi Iqbal Co-authors: Asad Islam, Vy Nguyen Extended Abstract

Introduction and Design While the weak financial regulations generally take the blow in the wake of any financial crisis, the role of financial knowledge of the consumers and investors in protecting their financial health has also been increasingly incriminated in both developed and developing worlds. The global financial crisis of the last decade taught us a lesson on the cost of financial illiteracy and this has also spurred renewed interest of the policy makers and academicians in how to make citizens more financially literate. There is a huge body of RCT based evidence on the impact of financial trainings designed for the students, entrepreneurs, retirees, borrowers, migrant workers, remittance receivers, etc. on their financial decision making, particularly saving, investment and borrowing1. While there is an evidence that financial literacy increases stock market participation (Van Rooij et al. 2011), there is no evidence that financial literacy or the knowledge of the stock market has any impact on the portfolio performance of the investors. Participation is important for stock market development, but it is the portfolio performance that matters for individuals’ welfare and this in turn also determines whether they will stay in the market or not. To the best of our knowledge, ours is the first study to assess the impact of training on stock market on the actual trading behavior of the investors. We partnered with eight brokerage houses of Bangladesh and their willing clients were randomly selected into treatment (201) and control groups (132). We conducted a three-day long training sessions on fundamental and technical analysis of the stock market. The partnership with the brokerage houses allows us access to the daily transaction and monthly portfolio data of the selected traders. We construct the daily performance measures of these traders and compare these measures across treatment and control groups for both post and pre-treatment periods. We have data for outcome variables for 16 months, 8 months before training and 8 months after training. Our outcome variables include number and volume of buys and sales, realized and unrealized gains and losses, portfolio value and some measures of portfolio diversification. We also conduct baseline surveys on socioeconomic and other characteristics of the traders which have bearing on their trading behavior (personality, self-confidence, self1 For a review of the evidence on economic importance of financial literacy, see Lusardi and Mitchell (2014). efficacy, self-assessed knowledge on stock maker). Finally, prior to the training, we run a labin-the-field session to elicit risk, time, and ambiguity preferences of the traders.


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