Beyond Home Bias: Foreign Portfolio Holdings and Information Heterogeneity
69 Pages Posted: 6 Oct 2017 Last revised: 21 Oct 2020
Date Written: October 21, 2020
We provide new evidence that international portfolios reflect the underlying heterogeneity in investors' beliefs. Using data on foreign sovereign debt holdings of European banks matched with their forecasts on future bond yields, we find that expecting higher returns and having more accurate forecasts are associated with larger bond holdings. Crucially, the elasticity of portfolio holdings to expected returns is increasing in the precision of the forecast, implying that investors optimally exploit comparative advantages in information production. We rationalize the results in a model where partial information specialization arises endogenously, which leads to further testable implications that we confirm in the data.
Keywords: International Investment, Portfolio Choice, Expectations, Information Choice
JEL Classification: F21, F36, G11, D82
Suggested Citation: Suggested Citation