Margarida Abreu

Financial literacy and portfolio diversification

We use a survey of individual investors disclosed by the Portuguese Securities Commission (CMVM) in May 2005 to study the impact of investors’ levels of financial literacy on portfolio diversification. We consider distinct aspects of financial literacy, and control for socioeconomic and behavioral differences among individual groups of investors. Our results suggest that investors’ educational levels and their financial knowledge have a positive impact on investor diversification. The information sources used by retail investors to gather information on markets and financial products also have a significant impact on the number of different assets included in a portfolio.

Home country bias: Does domestic experience help investors enter foreign markets?

This paper investigates the dynamics of individuals investments leading up to their decision to make the first investment abroad. We show that investors first invest in domestic securities and only some time later they invest abroad in foreign securities. We also show that investors who trade more often in the domestic market start to invest abroad earlier. Our findings suggest that the experience investors acquire while they trade in the domestic market is a key reason why active investors enter the foreign market earlier. A reason is that highly educated investors as well as investors with more financial knowledge, arguably those for whom learning by trading is the least important, do not need to trade as much in the domestic market before they start investing in foreign securities. Another reason is that investors who start investing in foreign securities are able to improve on their performance afterwards. This improvement in performance constitutes further evidence that the home country bias is costly.

The Investor in Structured Retail Products: Marketing Driven or Gambling Oriented?

Structured retail products (SRP) are one of the most visible faces of financial innovation and are becoming increasingly popular amongst retail investors. However, there is strong consensus that retail investors’ preference for structured products is difficult to explain using the standard rational theory, those products being in general sold at a significant premium. Studying the actual trading behavior of individual investors we provide evidence consistent with the view that SRP likely offer value to some informed investors compared to other products, that product complexity is a way to complete markets and that SRP allow investors to access segments otherwise not available to them. Nonetheless, our results also suggest that the increasing popularity of SRP is deeply related to investors’ behavioral biases, particularly overconfidence and gambling. Moreover, results also show that SRP trading activity cannot be dissociated from aggressive marketing practices. The study is structured as follows: The next section describes the database used. The third section traces the socio-demographic profile of investors in SRP, making a comparison with equity investors and the general Portuguese population. In section 4 alternative models are estimated to help define the profile of investors in SRP and evaluate the influence of behavioral traits in this characterization. In the last section some final conclusions are drawn. We start out documenting that investors in SRP are different than investors in other instruments. We then test the impact of financial literacy on the investment in SRP and conclude that more knowledgeable and sophisticated investors are more likely to invest in SRP. This is consistent with the idea that if product complexity is a way to complete markets, then more knowledgeable and sophisticated retail investors will be offered (and will invest in) more complex structured products. We also conclude that overconfident investors participate (and trade) more in the structured retail product market, and that the contact between the product distributor and the investor is most relevant. Therefore, marketing is a strong determinant of the investment is SRP thus providing a rationale for overpricing. Finally, our results allow us to conclude that gambling may justify investors’ irrationality when they opt for SRP.

Are Banks Sensitive to Monetary and Exchange Rate Policy

This paper studies banks sensitiveness to monetary and exchange rate policy. Although some of the past studies of bank performance use macroeconomic explanatory variables, this is the first study to examine the impact of the exchange rate and monetary policy on bank interest margins and profitability, combining a broad cross section of bank balance sheet and income statement information in 12 European countries with a time series dimension (for the period 1988-98).The main conclusions of the study are threefold. First, monetary and exchange rate policy do matter. Second, the impact on commercial banks is different from the impact on other types of banks. Third, bank size is relevant.

Monetary and Financial Instability and European Bank Interest Margins

This paper studies the extent to which financial instability and monetary and exchange rate policy influence European bank net interest margins, controlling for microeconomic variables and allowing for the heterogeneity of the banking industry. The sample is a broad cross-section of balance sheet and income statement information provided by banks from 12 European countries. We conclude that European banks are sensitive to exchange rate and interest rate volatility. They are also affected by their home country’s vulnerability to balance of payment and currency crises, but we find that banks feel differently about the associated risk of liquidity problems depending on their specialization. The instability of international financial markets is not good for banks, insofar as interest and exchange rate volatility both have a negative impact on the net interest margin.