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Endogenous Acquisition of Information and the Equity Home Bias

Lundtofte, Frederik LU (2009) In Economica 76(304). p.741-759
Abstract
This paper investigates the extent to which differences in information costs can explain the equity home bias puzzle. In a model where information costs are higher for the Foreign asset than for the Home asset, we show that---if cost functions are convex and the assets have identical return characteristics---the expected size of the home bias in terms of differences in expected demands is positive and increasing in expected excess returns and risk, but decreasing in risk aversion. However, a calibration to US data suggests that information costs can explain only a small fraction of the observed home bias.
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
equity home bias, information acquisition, information costs
in
Economica
volume
76
issue
304
pages
741 - 759
publisher
Wiley-Blackwell
external identifiers
  • wos:000269976600007
  • scopus:70349495516
ISSN
1468-0335
DOI
10.1111/j.1468-0335.2008.00728.x
language
English
LU publication?
yes
id
39a2576e-896a-4450-9e26-0a5b826c97d5 (old id 1387747)
date added to LUP
2016-04-01 12:20:03
date last changed
2022-02-26 05:38:50
@article{39a2576e-896a-4450-9e26-0a5b826c97d5,
  abstract     = {{This paper investigates the extent to which differences in information costs can explain the equity home bias puzzle. In a model where information costs are higher for the Foreign asset than for the Home asset, we show that---if cost functions are convex and the assets have identical return characteristics---the expected size of the home bias in terms of differences in expected demands is positive and increasing in expected excess returns and risk, but decreasing in risk aversion. However, a calibration to US data suggests that information costs can explain only a small fraction of the observed home bias.}},
  author       = {{Lundtofte, Frederik}},
  issn         = {{1468-0335}},
  keywords     = {{equity home bias; information acquisition; information costs}},
  language     = {{eng}},
  number       = {{304}},
  pages        = {{741--759}},
  publisher    = {{Wiley-Blackwell}},
  series       = {{Economica}},
  title        = {{Endogenous Acquisition of Information and the Equity Home Bias}},
  url          = {{http://dx.doi.org/10.1111/j.1468-0335.2008.00728.x}},
  doi          = {{10.1111/j.1468-0335.2008.00728.x}},
  volume       = {{76}},
  year         = {{2009}},
}