Abstract

http://ssrn.com/abstract=1294476
 
 

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Information Immobility and the Home Bias Puzzle


Stijn Van Nieuwerburgh


New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Laura Veldkamp


New York University - Stern School of Business; National Bureau of Economic Research (NBER)

July 2005

NYU Working Paper No. FIN-04-026

Abstract:     
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 more investors can learn, the more home biased their portfolios become. The model's predictions are consistent with observed patterns of foreign investment, returns, and portfolio flows.

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Date posted: November 3, 2008  

Suggested Citation

Van Nieuwerburgh, Stijn and Veldkamp, Laura, Information Immobility and the Home Bias Puzzle (July 2005). NYU Working Paper No. FIN-04-026. Available at SSRN: http://ssrn.com/abstract=1294476

Contact Information

Stijn Van Nieuwerburgh (Contact Author)
New York University Stern School of Business, Department of Finance ( email )
44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Laura Veldkamp
New York University - Stern School of Business ( email )
44 West 4th St. - Suite 7-180
New York, NY 100012
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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