Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/58851 
Year of Publication: 
2011
Series/Report no.: 
IZA Discussion Papers No. 6060
Publisher: 
Institute for the Study of Labor (IZA), Bonn
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: 
Document Type: 
Working Paper

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