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Human Capital, Endogenous Information Acquisition,and Home Bias in Financial Markets

Author

Listed:
  • Isaac Ehrlich

    (State University of New York at Buffalo and National Bureau of Economic Research and Hong Kong Institute for Monetary Research)

  • Jong Kook Shin

    (State University of New York at Buffalo)

  • Yong Yin

    (State University of New York at Buffalo)

Abstract

Considerable attention has been devoted in the financial literature to excessive portfolio concentrations in domestic risky assets relative to those predicted by standard finance models-generally identified as"home bias"-across international markets. The innovation we offer is ascribing home bias to endogenous information acquisition, or"asset management"(see EHY 2008), resulting from variations in human capital endowments. We develop discriminating hypotheses about the roles of"specific" and"general"human capital endowments and the direct and opportunity costs of asset management in determining how home bias varies among individual investors and across financial markets. Our model also provides insights concerning differences across countries in the degree to which their domestic asset prices are"information revealing".These hypotheses are tested against 8 national probability samples of individual portfolio compositions in the US over 1992-2007, and 7 international samples over 2001-2007 including 23 countries. The findings are consistent with our hypotheses.

Suggested Citation

  • Isaac Ehrlich & Jong Kook Shin & Yong Yin, 2010. "Human Capital, Endogenous Information Acquisition,and Home Bias in Financial Markets," Working Papers 202010, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:202010
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    File URL: http://www.hkimr.org/uploads/publication/90/ub_full_0_2_253_wp-no-20_2010-final-.pdf
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    References listed on IDEAS

    as
    1. Isaac Ehrlich & William A. Hamlen Jr. & Yong Yin, 2008. "Asset Management, Human Capital, and the Market for Risky Assets," Journal of Human Capital, University of Chicago Press, vol. 2(3), pages 217-262.
    2. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, June.
    3. Yamarik Steven J, 2008. "Estimating Returns to Schooling from State-Level Data: A Macro-Mincerian Approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-16, August.
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    Cited by:

    1. Isaac Ehrlich & Jong Kook Shin, 2010. "Human Capital and Imperfectly Informed Financial Markets," American Economic Review, American Economic Association, vol. 100(2), pages 244-249, May.

    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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