Working Paper: NBER ID: w13366
Authors: Stijn van Nieuwerburgh; Laura Veldkamp
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.
Keywords: home bias; information asymmetry; investment behavior; portfolio choice
JEL Codes: D82; F30; F40; G11; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Home investors possess a slight information advantage regarding home assets (G51) | Home investors choose to learn more about these assets rather than foreign assets (G15) |
| Home investors choose to learn more about these assets rather than foreign assets (G15) | This choice amplifies their comparative advantage and leads to higher expected excess returns on home assets (G11) |
| This choice amplifies their comparative advantage and leads to higher expected excess returns on home assets (G11) | This behavior results in a significant home bias (G41) |
| Home investors choose not to learn about foreign assets (G15) | Sustained home bias in their portfolios (G51) |