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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. Ce mémoire montre que l’intégration financière imparfaite et l’information asymétrique ne sont pas des théories concurrentes mais plutôt des idées complémentaires à l’intérieur d’une résolution unifiée de l’énigme du biais en faveur du marché domestique. On développe un modèle d’anticipations rationnelles des prix des actifs face à des investisseurs confrontés à des contraintes informationnelles, et on découvre que les avantages informationnels émergent de manière endogène en réponse à de petites frictions financières. On montre empiriquement que (i) les frictions financières internationales sont co‐reliées aux patterns d’attention observés des investisseurs des Etats‐Unis, et que (ii) l’attention portée par les investisseurs américains aux marchés financiers étrangers aide à expliquer le biais en faveur du marché domestique de ces pays, même après avoir pris en compte les niveaux d’intégration financière.

Suggested Citation

  • Jordi Mondria & Thomas Wu, 2013. "Imperfect financial integration and asymmetric information: competing explanations of the home bias puzzle?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(1), pages 310-337, February.
    • Handle: RePEc:wly:canjec:v:46:y:2013:i:1:p:310-337
    DOI: 10.1111/caje.12013
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    8. G. Andrew Karolyi & David T. Ng & Eswar S. Prasad, 2013. "The Coming Wave," Working Papers 082013, Hong Kong Institute for Monetary Research.
    9. Зиядин С. & Кабашева Н., 2018. "Основы Инициативы Евразийской Интеграции Сельского Хозяйства," Вопросы государственного и муниципального управления // Public administration issues, НИУ ВШЭ, issue 5, pages 56-67.
    10. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2015. "Education and the local equity bias around the world," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-76, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2014. "The role of education in equity portfolios during the recent financial crisis," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-26, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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