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Information Immobility and the Home Bias Puzzle

Author Info

Listed author(s):
  • 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 does global information access not 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 outperformance, and asset prices. Finally, we propose new avenues for empirical research. Copyright (c) 2009 The American Finance Association.

(This abstract was borrowed from another version of this item.)

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

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Date of creation: 2005
Handle: RePEc:red:sed005:78
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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Keywords: home bias; international equity flows; asymmetric information; information theory;

Other versions of this item:

Find related papers by JEL classification:
  • F30 - International Economics - - International Finance - - - General
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
  • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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