FIN-04-026

Information Immobility and the Home Bias Puzzle

November 2004

Stijn Van Nieuwerburgh and Laura Veldkamp

ABSTRACT
Many explanations for home or local 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 want to exploit increasing returns to specialization: The bigger the home information advantage, the more desirable are home assets; but the more home assets investors expect to own, the higher the value of additional home information. 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. Information is least mobile when learning capacity and foreign market capitalization are small.

Stijn Van Nieuwerburgh
Institution: Stern School of Business, New York University
Phone: (212) 998-0673
Fax: (212) 995-4233
Email: svnieuwe@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~svnieuwe/


Laura Veldkamp
Institution: Stern School of Business, New York University
Email: lveldkam@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~lveldkam/

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