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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
2009-04-20 12:27:26
date last changed
2017-01-01 05:03:09
@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},
  keyword      = {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},
  volume       = {76},
  year         = {2009},
}