Does Asymmetric Information Cause the Home Equity Bias?

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'...

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Main Author:	Bravo-Ortega, Claudio
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2012
Subjects:	ASSET PRICES ASSETS ASYMMETRIC INFORMATION BANK BRANCHES BENCHMARK CAPITAL FLOWS CORPORATE FINANCE CURRENCY DOMESTIC EQUITY ECONOMIC DYNAMICS EMPIRICAL EVIDENCE ENDOWMENTS EQUILIBRIUM EQUITY FLOWS EQUITY MARKETS EQUITY PRICES EXPECTED VALUE EXPECTED VALUES FINANCIAL ASSETS FINANCIAL ECONOMICS FINANCIAL INFORMATION FINANCIAL MARKETS FOREIGN EQUITIES FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OWNERSHIP HUMAN CAPITAL INFORMATION ACQUISITION INFORMATION ASYMMETRIES INTERNATIONAL FINANCE INVESTMENT BANKS INVESTMENT DECISIONS LIQUIDITY LIQUIDITY CONSTRAINTS MACROECONOMICS MUTUAL FUND MUTUAL FUNDS PORTFOLIO PORTFOLIO DIVERSIFICATION PORTFOLIO INVESTMENT PORTFOLIO INVESTMENT FLOWS PORTFOLIOS PRIVATE INFORMATION PURCHASES RATIONAL EXPECTATIONS RISK AVERSION RISK SHARING SECURITIES SECURITIES MARKETS STOCK MARKET STOCKS THEORETICAL MODELS TRADERS TRANSACTION COSTS UTILITY FUNCTION WEALTH
Online Access:	http://documents.worldbank.org/curated/en/2005/01/5619960/asymmetric-information-cause-home-equity-bias http://hdl.handle.net/10986/8909

id	okr-10986-8909
recordtype	oai_dc
spelling	okr-10986-89092021-04-23T14:02:42Z Does Asymmetric Information Cause the Home Equity Bias? Bravo-Ortega, Claudio ASSET PRICES ASSETS ASYMMETRIC INFORMATION BANK BRANCHES BENCHMARK CAPITAL FLOWS CORPORATE FINANCE CURRENCY DOMESTIC EQUITY ECONOMIC DYNAMICS EMPIRICAL EVIDENCE ENDOWMENTS EQUILIBRIUM EQUITY FLOWS EQUITY MARKETS EQUITY PRICES EXPECTED VALUE EXPECTED VALUES FINANCIAL ASSETS FINANCIAL ECONOMICS FINANCIAL INFORMATION FINANCIAL MARKETS FOREIGN EQUITIES FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OWNERSHIP HUMAN CAPITAL INFORMATION ACQUISITION INFORMATION ASYMMETRIES INTERNATIONAL FINANCE INVESTMENT BANKS INVESTMENT DECISIONS LIQUIDITY LIQUIDITY CONSTRAINTS MACROECONOMICS MUTUAL FUND MUTUAL FUNDS PORTFOLIO PORTFOLIO DIVERSIFICATION PORTFOLIO INVESTMENT PORTFOLIO INVESTMENT FLOWS PORTFOLIOS PRIVATE INFORMATION PURCHASES RATIONAL EXPECTATIONS RISK AVERSION RISK SHARING SECURITIES SECURITIES MARKETS STOCK MARKET STOCKS THEORETICAL MODELS TRADERS TRANSACTION COSTS UTILITY FUNCTION WEALTH 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, the author tries to explain the effect of asymmetric information in the home equity bias puzzle. While asymmetric information 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, the author illustrates 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 by the author. 2012-06-25T14:30:05Z 2012-06-25T14:30:05Z 2005-01 http://documents.worldbank.org/curated/en/2005/01/5619960/asymmetric-information-cause-home-equity-bias http://hdl.handle.net/10986/8909 English en_US Policy Research Working Paper; No. 3495 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	ASSET PRICES ASSETS ASYMMETRIC INFORMATION BANK BRANCHES BENCHMARK CAPITAL FLOWS CORPORATE FINANCE CURRENCY DOMESTIC EQUITY ECONOMIC DYNAMICS EMPIRICAL EVIDENCE ENDOWMENTS EQUILIBRIUM EQUITY FLOWS EQUITY MARKETS EQUITY PRICES EXPECTED VALUE EXPECTED VALUES FINANCIAL ASSETS FINANCIAL ECONOMICS FINANCIAL INFORMATION FINANCIAL MARKETS FOREIGN EQUITIES FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OWNERSHIP HUMAN CAPITAL INFORMATION ACQUISITION INFORMATION ASYMMETRIES INTERNATIONAL FINANCE INVESTMENT BANKS INVESTMENT DECISIONS LIQUIDITY LIQUIDITY CONSTRAINTS MACROECONOMICS MUTUAL FUND MUTUAL FUNDS PORTFOLIO PORTFOLIO DIVERSIFICATION PORTFOLIO INVESTMENT PORTFOLIO INVESTMENT FLOWS PORTFOLIOS PRIVATE INFORMATION PURCHASES RATIONAL EXPECTATIONS RISK AVERSION RISK SHARING SECURITIES SECURITIES MARKETS STOCK MARKET STOCKS THEORETICAL MODELS TRADERS TRANSACTION COSTS UTILITY FUNCTION WEALTH
spellingShingle	ASSET PRICES ASSETS ASYMMETRIC INFORMATION BANK BRANCHES BENCHMARK CAPITAL FLOWS CORPORATE FINANCE CURRENCY DOMESTIC EQUITY ECONOMIC DYNAMICS EMPIRICAL EVIDENCE ENDOWMENTS EQUILIBRIUM EQUITY FLOWS EQUITY MARKETS EQUITY PRICES EXPECTED VALUE EXPECTED VALUES FINANCIAL ASSETS FINANCIAL ECONOMICS FINANCIAL INFORMATION FINANCIAL MARKETS FOREIGN EQUITIES FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN OWNERSHIP HUMAN CAPITAL INFORMATION ACQUISITION INFORMATION ASYMMETRIES INTERNATIONAL FINANCE INVESTMENT BANKS INVESTMENT DECISIONS LIQUIDITY LIQUIDITY CONSTRAINTS MACROECONOMICS MUTUAL FUND MUTUAL FUNDS PORTFOLIO PORTFOLIO DIVERSIFICATION PORTFOLIO INVESTMENT PORTFOLIO INVESTMENT FLOWS PORTFOLIOS PRIVATE INFORMATION PURCHASES RATIONAL EXPECTATIONS RISK AVERSION RISK SHARING SECURITIES SECURITIES MARKETS STOCK MARKET STOCKS THEORETICAL MODELS TRADERS TRANSACTION COSTS UTILITY FUNCTION WEALTH Bravo-Ortega, Claudio Does Asymmetric Information Cause the Home Equity Bias?
relation	Policy Research Working Paper; No. 3495
description	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, the author tries to explain the effect of asymmetric information in the home equity bias puzzle. While asymmetric information 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, the author illustrates 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 by the author.
format	Publications & Research :: Policy Research Working Paper
author	Bravo-Ortega, Claudio
author_facet	Bravo-Ortega, Claudio
author_sort	Bravo-Ortega, Claudio
title	Does Asymmetric Information Cause the Home Equity Bias?
title_short	Does Asymmetric Information Cause the Home Equity Bias?
title_full	Does Asymmetric Information Cause the Home Equity Bias?
title_fullStr	Does Asymmetric Information Cause the Home Equity Bias?
title_full_unstemmed	Does Asymmetric Information Cause the Home Equity Bias?
title_sort	does asymmetric information cause the home equity bias?
publisher	World Bank, Washington, DC
publishDate	2012
url	http://documents.worldbank.org/curated/en/2005/01/5619960/asymmetric-information-cause-home-equity-bias http://hdl.handle.net/10986/8909
_version_	1764407100804431872

Does Asymmetric Information Cause the Home Equity Bias?

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