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Endogenous Acquisition of Information and the Equity Home Bias

Author

  • Frederik Lundtofte

Summary, in English

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.

Publishing year

2009

Language

English

Pages

741-759

Publication/Series

Economica

Volume

76

Issue

304

Document type

Journal article

Publisher

Wiley-Blackwell

Topic

  • Economics

Keywords

  • equity home bias
  • information acquisition
  • information costs

Status

Published

ISBN/ISSN/Other

  • ISSN: 1468-0335