IDEAS home Printed from
   My bibliography  Save this paper

Asymmetric Information and the Lack of International Portfolio


  • Juan Carlos Hatchondo

    () (Research Department Federal Reserve Bank of Richmond)


There is pervasive evidence that individuals invest primarily in domestic assets and thus hold poorly diversified portfolios. Empirical studies suggest that informational asymmetries may play a role in explaining the bias towards domestic assets. In contrast, theoretical studies based on asymmetric information fail to produce significant quantitative effects. The present paper develops a theoretical model in which the presence of informational asymmetries explains a significant fraction of the home equity bias observed in the data. The main departure from previous theoretical work is the assumption that local investors outperform foreign investors in identifying the correct ranking of local investment opportunities instead of possessing superior information about the aggregate performance of the domestic stock market. The other key assumption is based on the evidence that short-selling is a costly activity. This paper studies the case of a two-country world. There are two assets in each country. Only local investors receive informative signals about local assets. Thus, domestic agents have an incentive to concentrate their investments in the local asset favored by the signal realization, and reduce the position held in the other local asset. When the signal is sufficiently informative and short-sales are costly, local investors decide not to finance purchases of the perceived ``good'' local asset by selling short the perceived ``bad'' local asset. Instead they invest a lower fraction of their portfolio in foreign securities. This liberates resources that can be allocated in the local asset perceived to pay higher expected returns

Suggested Citation

  • Juan Carlos Hatchondo, 2006. "Asymmetric Information and the Lack of International Portfolio," 2006 Meeting Papers 849, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:849

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    References listed on IDEAS

    1. Obstfeld, Maurice, 1994. "Risk-Taking, Global Diversification, and Growth," American Economic Review, American Economic Association, vol. 84(5), pages 1310-1329, December.
    2. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
    3. Chamon, Marcos & Mauro, Paolo, 2006. "Pricing growth-indexed bonds," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3349-3366, December.
    4. Cristina Arellano, 2005. "Default Risk, the Real Exchange Rate and Income Fluctuations in Emerging Economies," 2005 Meeting Papers 516, Society for Economic Dynamics.
    5. Yue, Vivian Z., 2010. "Sovereign default and debt renegotiation," Journal of International Economics, Elsevier, vol. 80(2), pages 176-187, March.
    6. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June.
    7. Grossman, Herschel I & Van Huyck, John B, 1988. "Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation," American Economic Review, American Economic Association, vol. 78(5), pages 1088-1097, December.
    8. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
    9. Alfaro, Laura & Kanczuk, Fabio, 2005. "Sovereign debt as a contingent claim: a quantitative approach," Journal of International Economics, Elsevier, vol. 65(2), pages 297-314, March.
    10. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    11. Eduardo Borensztein & Paolo Mauro, 2004. "The case for GDP-indexed bonds," Economic Policy, CEPR;CES;MSH, vol. 19(38), pages 165-216, April.
    Full references (including those not matched with items on IDEAS)

    More about this item


    International portfolio diversification; home bias; asymmetric information;

    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


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed006:849. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.