Information Immobility and the Home Bias Puzzle
نویسندگان
چکیده
Many explanations for home or local bias rely on information asymmetry: investors know more about their home assets. A criticism of these theories is that asymmetry should disappear when information is tradable. This criticism is flawed. If investors have asymmetric prior beliefs, but choose how to allocate limited learning capacity before investing, they will not necessarily learn foreign information. Investors want to exploit increasing returns to specialization: The bigger the home information advantage, the more desirable are home assets; but the more home assets investors expect to own, the higher the value of additional home information. Even with a tiny home information advantage, and even when foreign information is no harder to learn, many investors will specialize in home assets, remain uninformed about foreign assets, and amplify their initial information asymmetry. The model’s predictions are consistent with observed patterns of local and foreign investment. ∗Stijn Van Nieuwerburgh: [email protected], NYU Stern, Finance Department, 44 West 4th St., 9th floor, New York, NY 10012. Laura Veldkamp: [email protected], NYU Stern, Economics Department, 44 West 4th St., 7th floor, New York, NY 10012. Thanks to Dave Backus, Pierre-Olivier Gourinchas, David Lesmond, Arzu Ozoguz, Hyun Shin, Chris Sims, Eric Van Wincoop, Mark Wright, and seminar participants at the Prague workshop in macro theory, Budapest SED, CEPR meetings in Gerzensee, Econometric Society, EEA, Cleveland Fed int’l macro conference, FMA, FEA, AFA, Ohio State, Illinois, Iowa, Princeton, Virginia, GWU, NYU, MIT, and the NBER EF&G meetings for helpful comments and discussion. JEL classification: F30, F40, D82.
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