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Private Information, Human Capital, and Optimal "Home Bias" in Financial Markets

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  • Isaac Ehrlich
  • Jong Kook Shin
  • Yong Yin

Abstract

By allowing for imperfectly informed markets but optimal private information acquisition, we offer new insights about observed variations in portfolio concentrations in domestic versus foreign risky assets, or "home bias," and the degree to which home asset prices are "information revealing." Our model produces discriminating hypotheses about the role of "specific" and "general" human capital endowments and opportunity costs of managing risky assets in determining whether to hold these assets and how their portfolio shares vary across heterogeneous investors and financial markets. These hypotheses are supported by numerical and econometric analyses of panel data from the United States and 23 international financial markets.

Suggested Citation

  • Isaac Ehrlich & Jong Kook Shin & Yong Yin, 2011. "Private Information, Human Capital, and Optimal "Home Bias" in Financial Markets," Journal of Human Capital, University of Chicago Press, vol. 5(3), pages 255-301.
    • Handle: RePEc:ucp:jhucap:doi:10.1086/662546
    DOI: 10.1086/662546
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    Cited by:

    1. Eva M. Berger & Luke Haywood, 2016. "Locus of Control and Mothers’ Return to Employment," Journal of Human Capital, University of Chicago Press, vol. 10(4), pages 442-481.
    2. Martin McGuigan & Sandra McNally & Gill Wyness, 2016. "Student Awareness of Costs and Benefits of Educational Decisions: Effects of an Information Campaign," Journal of Human Capital, University of Chicago Press, vol. 10(4), pages 482-519.
    3. Isaac Ehrlich & Jong Kook Shin, 2010. "The Role of Human Capital in Imperfectly Informed International Financial Markets," Working Papers 092010, Hong Kong Institute for Monetary Research.
    4. Stephen J. Turnovsky & Aditi Mitra, 2013. "The Interaction between Human and Physical Capital Accumulation and the Growth-Inequality Trade-off," Journal of Human Capital, University of Chicago Press, vol. 7(1), pages 26-75.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F30 - International Economics - - International Finance - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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