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Imperfect financial integration and asymmetric information: competing explanations of the home bias puzzle?

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  • Jordi Mondria
  • Thomas Wu

Abstract

This paper shows that imperfect financial integration and informational asymmetries are not competing theories but rather complementary ideas to a single explanation of the home bias puzzle. We develop a rational expectations model of asset prices with investors that face informational constraints and find that informational advantages arise endogenously as a response to small financial frictions. We also present empirical evidence that (i) international financial frictions are correlated to observed patterns of US investors' attention and that (ii) the attention US investors allocate to foreign stocks helps explain home bias towards those countries, even after controlling for financial integration levels.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 46 (2013)
Issue (Month): 1 (February)
Pages: 310-337

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Handle: RePEc:cje:issued:v:46:y:2013:i:1:p:310-337

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Cited by:
  1. Jordi Mondria & Thomas Wu, 2012. "Familiarity and Surprises in International Financial Markets: Bad news travels like wildfire, good news travels slow," 2012 Meeting Papers 50, Society for Economic Dynamics.
  2. Reuven Glick & Michael Hutchison, 2013. "China’s financial linkages with Asia and the global financial crisis," Working Paper Series 2013-12, Federal Reserve Bank of San Francisco.

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