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Information Immobility and the Home Bias Puzzle

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  • Laura Veldkamp
  • Stijn Van Nieuwerburgh

Abstract

Many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can. But why doesn't global information access eliminate this asymmetry? We model investors, endowed with a small home information advantage, who choose what information to learn before they invest. Surprisingly, even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know. Learning amplifies information asymmetry. The model matches patterns of local and industry bias, foreign investments, portfolio out-performance and asset prices. Finally, we propose new avenues for empirical research.

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File URL: http://pages.stern.nyu.edu/~lveldkam/pdfs/homebias.pdf
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File URL: http://repec.org/sed2005/up.26798.1104187276.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 78.

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Date of creation: 2005
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Handle: RePEc:red:sed005:78

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Web page: http://www.EconomicDynamics.org/society.htm
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Related research

Keywords: home bias; international equity flows; asymmetric information; information theory;

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References

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