Information Immobility and the Home Bias Puzzle

Stijn Van Nieuwerburgh and Laura Veldkamp

 

 

ABSTRACT:

Many explanations for home bias rely on information asymmetry: investors know more about their home assets. A criticism of these theories is that asymmetry should disappear when information is tradable. This criticism is flawed. If investors have asymmetric prior beliefs, but choose how to allocate limited learning capacity before investing, they will not necessarily learn foreign information. Investors profit more from knowing information that others do not know. Even with a tiny home information advantage, and even when foreign information is no harder to learn, many investors will specialize in home assets, remain uninformed about foreign assets, and amplify their initial information asymmetry. The model's predictions are consistent with observed patterns of foreign and local investment.