The Impact of Financial Literacy on Household Asset Allocation across Heterogeneous Groups: An Empirical Analysis from the Heterogeneity Perspective

Abstract

This paper investigates how financial literacy affects asset allocation decisions of different types of Chinese households. Based on China Household Finance Survey (CHFS) data spanning from 2015 to 2023, multiple regression models, grouped heterogeneity analysis and the instrumental variable approach are adopted to explore the correlation between household financial literacy and asset allocation efficiency. Empirical results demonstrate that improvements in financial literacy scores significantly raise the share of risky assets held by households: each one-point rise in financial literacy lifts the proportion of risky asset allocation by 0.5% to 1%, while cutting holdings of low-risk assets by 0.3% to 0.7%. Heterogeneity analysis reveals that households with high income and young-to-middle-aged decision-makers display stronger risk appetite when their financial literacy improves, whereas low-income and remote-area households tend to maintain conservative asset allocation strategies. Furthermore, instrumental variable regression and robustness checks verify the reliability of empirical outcomes, and further confirm education attainment and financial popularization as critical determining factors. This research not only enriches the theoretical framework linking financial literacy and household asset allocation but also puts forward targeted policy suggestions to optimize household wealth management and asset allocation, such as expanding the coverage of financial education and designing tiered guiding policies for asset allocation to facilitate the overall wealth accumulation of Chinese households.