Does Asymmetric Information Cause the Home Equity Bias? [book]

Claudio Bravo-Ortega
2005 Policy Research Working Papers  
The home equity bias is one of the many puzzles existing in international finance. This puzzle is characterized by the concentration of domestic equity in any investor's portfolio, which is in contradiction with the benchmark of full diversification in a world mutual fund. Based on Admati's (1985) and Gehrig's (1993) noisy rational expectation models, this paper attempts to explain the effect of asymmetric information in the home equity bias puzzle. While asymmetric information helps to explain
more » ... on helps to explain the puzzle for the case of one domestic and one foreign equity, this result relies on very restrictive assumptions. Using a model with one domestic asset and two foreign assets, I illustrate that asymmetries of information are also consistent with home equity bias reversals. One proposition generalizes these results. Simulations corroborate the main theoretical predictions of the model presented in this paper.
doi:10.1596/1813-9450-3495 fatcat:etkb4l65bfbjnn6mpxctj5etbm