Information and Cross-Border Equity Holdings

Abstract

This paper studies, both theoretically and empirically, dispersion in cross-border equity holdings. We propose a rational expectations equilibrium model in which agents have information about asset specific and/or common components of stocks' payoffs. The model produces closed-form solutions for asset prices and investor holdings (positions). A numerical analysis can generate home bias levels similar to those found in existing studies as well as reverse home bias (i.e., investors from one country overweigh stocks from another country). The last section of the paper analyzes cross-border mutual fund holdings of 5,781 stocks from 21 developed countries. We create a proxy variable for the degree of asset specific information about a stock and another proxy for the degree of common component information. Double sorting stocks using our information proxies produces ownership dispersion similar to that implied by the model. In regression analysis, our information proxies explain holding levels even after including variables that have previously been linked to home bias.

Keywords: Information Asymmetry, REE Models, Home Bias

JEL Classification: D82, G11, G12, G15