Wealth Heterogeneity, Information Acquisition and Equity Home Bias: Evidence from U.S. Household Surveys of Consumer Finance
69 Pages Posted: 23 Feb 2018 Last revised: 5 Mar 2021
Date Written: February 14, 2018
The well-known equity home bias has two components: an extensive and intensive margin. Using data on direct stock holdings of U.S. households, we find that the decision to participate in foreign stock markets depends on investor wealth, with richer investors more likely to participate (the extensive margin). We document a new finding: as investor wealth increases, the portfolio share invested in foreign equities tends to decrease (the intensive margin). A noisy rational expectations equilibrium model with wealth heterogeneity, entry costs, and endogenously chosen information processing capacity can generate the new negative relationship and help understand the U.S. household equity home bias along both margins.
Keywords: Equity Home Bias, Extensive and Intensive Margins, Information Acquisition, Entry Cost, Wealth Heterogeneity
JEL Classification: D82, F30, G11
Suggested Citation: Suggested Citation