ASYMMETRIC INFORMATION AND THE LACK OF PORTFOLIO DIVERSIFICATION

Juan Hatchondo

International Economic Review, 2008, vol. 49, issue 4, 1297-1330

Abstract: There is pervasive evidence that individuals invest primarily in local stocks and thus hold poorly diversified portfolios. The present article develops a theoretical model in which the presence of informational asymmetries introduces home equity bias. The main departure from previous theoretical work is the assumption that local investors outperform nonlocal investors in identifying the correct ranking of local investment opportunities, instead of possessing superior information about the aggregate performance of the local stock market. The second key assumption is based on the evidence that short-selling is a costly activity. Copyright © (2008) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2008
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