Information Immobility and the Home Bias Puzzle

Abstract:     
Many papers have argued that home bias arises because home investors can predict payoffs of 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 and can choose what information to learn before they invest in 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 small home information advantage. The model is broadly consistent with local and industry bias as well as patterns of foreign investments, portfolio out-performance and asset prices. Finally, we outline new avenues for empirical research.

Number of Pages in PDF File: 44

Keywords: Home bias, asymmetric information, information theory, local bias

JEL Classification: F30, G11, D82

working papers series