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Does Risk Tolerance Mediates the Relationship Between Financial Literacy and Financial Wellbeing During COVID-19: Empirical Evidence From an Emerging Economy

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  • Muhammad Naveed
  • Shoaib Ali

Abstract

This study aims to explore the role of financial literacy in determining financial well-being during COVID-19. Additionally, we plan to examine how risk tolerance mediates between financial literacy and overall well-being. The data of 367 active individual investors on the Pakistan Stock Exchange was taken utilizing convenience sampling and the survey methodology. The relationship between financial literacy, risk tolerance, and financial well-being was investigated using structural equation modeling. The data were analyzed through Smart PLS. The finding of the study highlights that both advance and basic financial literacy have a positive and significant association with investor well-being. Furthermore, financial literacy has a favorable indirect impact on financial well-being highlighted in this study through risk tolerance. The effect of financial literacy on financial well-being was remarkably consistent across levels of demographic variables such as education, gender and age suggesting that improving financial literacy levels in the population may be an effective strategy to increase financial capability across the board during the COVID-19 crisis. The outcome of the study has several policy implications for investors and policymakers during uncertain times such as COVID-19, as providing literacy positively contributes to their risk tolerance which then translates into higher financial well-being. The paper’s novelty is that the authors have explored the mechanism by which basic and advanced levels of financial literacy influence investors’ risk tolerance and financial well-being during the COVID-19 pandemic in an emerging economy. It adds to the literature in behavioral finance, explicitly probing the impact of financial literacy on financial well-being; this field is in its initial stage, even in developed countries, while little work has been done in emerging countries. JEL Classification: B21, D01, D91, G11, J26, H31.

Suggested Citation

  • Muhammad Naveed & Shoaib Ali, 2024. "Does Risk Tolerance Mediates the Relationship Between Financial Literacy and Financial Wellbeing During COVID-19: Empirical Evidence From an Emerging Economy," SAGE Open, , vol. 14(4), pages 21582440241, December.
  • Handle: RePEc:sae:sagope:v:14:y:2024:i:4:p:21582440241297065
    DOI: 10.1177/21582440241297065
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    More about this item

    Keywords

    basic financial literacy; advanced financial literacy; risk tolerance; financial well-being; individual investors;
    All these keywords.

    JEL classification:

    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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