Information Immobility and the Home Bias Puzzle

TLDR

Home bias is often attributed to home investors’ superior ability to predict domestic asset returns compared to foreigners. The study investigates why global information access fails to eliminate home bias and suggests new empirical research directions. The authors model investors with a modest home information advantage who selectively acquire information before investing. The model shows that even when home investors can learn what foreigners know, they prefer to hold unique information, amplifying asymmetry and reproducing observed local and industry bias, foreign investment patterns, portfolio outperformance, and asset price effects.

Abstract

ABSTRACT Many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can. But why does global information access not eliminate this asymmetry? We model investors, endowed with a small home information advantage, who choose what information to learn before they invest. Surprisingly, even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know. Learning amplifies information asymmetry. The model matches patterns of local and industry bias, foreign investments, portfolio outperformance, and asset prices. Finally, we propose new avenues for empirical research.