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Human Capital, Endogenous Information Acquisition, and Home Bias in Financial Markets

HKIMR Working Paper No.20/2010

56 Pages Posted: 20 Sep 2010  

Isaac Ehrlich

State University of New York at Buffalo - Department of Economics; National Bureau of Economic Research (NBER); University of Chicago - University of Chicago Press; Institute for the Study of Labor (IZA)

Jong Kook Shin

Newcastle University Business School

Yong Yin

State University of New York (SUNY), Buffalo - College of Arts & Sciences - Department of Economics

Date Written: July 30, 2010

Abstract

Considerable attention has been devoted in the financial literature to excessive portfolio concentrations in domestic risky assets relative to those predicted by standard finance models – generally identified as “home bias” – across international markets. The innovation we offer is ascribing home bias to endogenous information acquisition, or “asset management” (see EHY 2008), resulting from variations in human capital endowments. We develop discriminating hypotheses about the roles of “specific” and “general” human capital endowments and the direct and opportunity costs of asset management in determining how home bias varies among individual investors and across financial markets. Our model also provides insights concerning differences across countries in the degree to which their domestic asset prices are “information revealing”. These hypotheses are tested against 8 national probability samples of individual portfolio compositions in the US over 1992-2007, and 7 international samples over 2001-2007 including 23 countries. The findings are consistent with our hypotheses.

JEL Classification: D82, F30, G11, G12, G15, J24

Suggested Citation

Ehrlich, Isaac and Shin, Jong Kook and Yin, Yong, Human Capital, Endogenous Information Acquisition, and Home Bias in Financial Markets (July 30, 2010). HKIMR Working Paper No.20/2010. Available at SSRN: https://ssrn.com/abstract=1679537 or http://dx.doi.org/10.2139/ssrn.1679537

Isaac Ehrlich (Contact Author)

State University of New York at Buffalo - Department of Economics ( email )

415 Fronczak Hall
Buffalo, NY 14260
United States
716-645 2121 (Phone)
716-645 2127 (Fax)

HOME PAGE: http://economics.buffalo.edu/people/ehrlich/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - University of Chicago Press ( email )

1427 E. 60th Street
Chicago, IL 60637
United States

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Jong Kook Shin

Newcastle University Business School ( email )

Newcastle upon Tyne, NE1 7RU
United Kingdom

Yong Yin

State University of New York (SUNY), Buffalo - College of Arts & Sciences - Department of Economics ( email )

Buffalo, NY 14260
United States

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