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Title:Private information, human capital, and optimal 'home bias' in financial markets PDF Logo
Authors:Ehrlich, Isaac
Shin, Jong Kook
Yin, Yong
Issue Date:2011
Series/Report no.:Discussion Paper series, Forschungsinstitut zur Zukunft der Arbeit 6060
Abstract:By allowing for imperfectly informed markets and the role of private information, we offer new insights about observed deviations of portfolio concentrations in domestic relative to foreign risky assets, or home bias, from what standard finance models predict. Our model ascribes the bias to endogenous information acquisition bolstered by investors' human capital. We develop discriminating hypotheses about the influence of specific and general human capital endowments and direct and opportunity costs of managing risky assets in determining whether to hold these assets, and how the assets' portfolio shares vary across investors and financial markets. These hypotheses are supported by numerical and econometric analyses of panel data from the US over 1992-2007, and 23 international financial markets over 2001-2007. The results indicate the existence of differences across countries in the degree to which home asset prices are information-revealing, which may be relevant for fully understanding the global financial crisis of 2007-09.
Subjects:private information
human capital
home bias
financial markets
risky assets
global financial crisis
JEL:D82
F30
G11
G12
G15
J24
Persistent Identifier of the first edition:urn:nbn:de:101:1-201111072746
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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