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Information Immobility and the Home Bias Puzzle

44 Pages Posted: 21 Nov 2005 Last revised: 6 May 2008

Stijn Van Nieuwerburgh

New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Laura Veldkamp

New York University - Stern School of Business; National Bureau of Economic Research (NBER)

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Date Written: April 19, 2008

Abstract

Many papers have argued that home bias arises because home investors can predict payoffs of their home assets more accurately than foreigners can. But why does this information advantage exist in a world where investors can learn foreign information? We model investors who are endowed with a small home information advantage and can choose what information to learn before they invest in risky assets. Surprisingly, even when home investors can learn what foreigners know, they choose not to. The reason is that investors profit more from knowing information that others do not know. Allowing investors to learn amplifies their initial small home information advantage. The model is broadly consistent with local and industry bias as well as patterns of foreign investments, portfolio out-performance and asset prices. Finally, we outline new avenues for empirical research.

Keywords: Home bias, asymmetric information, information theory, local bias

JEL Classification: F30, G11, D82

Suggested Citation

Van Nieuwerburgh, Stijn and Veldkamp, Laura, Information Immobility and the Home Bias Puzzle (April 19, 2008). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=619363 or http://dx.doi.org/10.2139/ssrn.619363

Stijn Van Nieuwerburgh (Contact Author)

New York University Stern School of Business, Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
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Laura Veldkamp

New York University - Stern School of Business ( email )

44 West 4th St. - Suite 7-180
New York, NY 100012
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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