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Home Bias and High Turnover in an Overlapping-generations Model with Learning

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Author Info
Massimo Guidolin

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Abstract

This paper develops a two-country overlapping-generations (OLG) model under the assumption that investors are on a learning path. While investors from both countries receive identical information flows, domestic investors start off with less precise prior beliefs concerning foreign fundamentals. On a learning path, differences in beliefs and estimation risk generate portfolio biases that match the empirical evidence: home bias in equity portfolios and trend-chasing in international flows. In addition, due to the higher volatility of the estimates of foreign state variables, our model produces excessive turnover in foreign securities. We calibrate the model on the historical path of quarterly real GDP data for the US and Europe. Under the assumption of a financial liberalization in the 1970s, the model produces preference for domestic securities and turnover. Copyright Blackwell Publishing Ltd 2005.

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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1467-9396.2005.00534.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of International Economics.

Volume (Year): 13 (2005)
Issue (Month): 4 (09)
Pages: 725-756
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Handle: RePEc:bla:reviec:v:13:y:2005:i:4:p:725-756

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Francis E. Warnock, 2001. "Home bias and high turnover reconsidered," International Finance Discussion Papers 702, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Francis E. Warnock & Chad Cleaver, 2002. "Financial centers and the geography of capital flows," International Finance Discussion Papers 722, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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