Information Immobility and the Home Bias Puzzle

38 Pages Posted: 3 Nov 2008

See all articles by Stijn Van Nieuwerburgh

Stijn Van Nieuwerburgh

Columbia University Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: July 2005

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 disappearwhen 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.

Suggested Citation

Van Nieuwerburgh, Stijn and Veldkamp, Laura, Information Immobility and the Home Bias Puzzle (July 2005). NYU Working Paper No. SC-AM-05-05. Available at SSRN: https://ssrn.com/abstract=1294632

Stijn Van Nieuwerburgh (Contact Author)

Columbia University Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Laura Veldkamp

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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