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

  • Isaac Ehrlich
  • Jong Kook Shin
  • Yong Yin

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.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/662546
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File URL: http://www.jstor.org/stable/full/10.1086/662546
Download Restriction: Access to the online full text or PDF requires a subscription.

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Article provided by University of Chicago Press in its journal Journal of Human Capital.

Volume (Year): 5 (2011)
Issue (Month): 3 ()
Pages: 255 - 301

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Handle: RePEc:ucp:jhucap:doi:10.1086/662546
Contact details of provider: Web page: http://www.journals.uchicago.edu/JHC/

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