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Information Immobility and the Home Bias Puzzle

Authors: Nieuwerburgh, Stijn Van
Veldkamp, Laura
Keywords: Home bias;asymmetric information;learning
Issue Date: 21-Nov-2007
Series/Report no.: FIN-07-017
Abstract: Many papers have argued that home bias arises because home investors can predict pays off their home assets more accurately than foreigners can. But why does this information advantage exist in a world where investors can learn foreign information? We model investors who are endowed with a small home information advantage. They can choose what information to learn before they invest in many risky assets. Surprisingly, even when home investors can learn what foreigners know, they choose not to. The reason is that investors profit more from knowing information that others do not know. Allowing investors to learn amplifies their initial information asymmetry. The model explains local and industry bias as well as observed patterns of foreign investments, portfolio out-performance and asset prices. Finally, we outline new avenues for empirical research.
Appears in Collections:Finance Working Papers

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