Home bias in portfolio choices: social learning among partially informed agents

Wen-Lin Wu () and Yin-Feng Gau
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Wen-Lin Wu: Feng Chia University

Review of Quantitative Finance and Accounting, 2017, vol. 48, issue 2, No 10, 527-556

Abstract: Abstract Using an ‘incomplete information’ model, we explore the role of social learning in the global portfolio choices of stock market investors. When partially informed followers attempt to estimate true domestic (home) mean returns, they likely acquire private domestic signals from partially informed leaders. However, the calibration results indicate the existence of home bias when partially informed agents have poor quality information. Partially informed agents are prone to a learning bias; they overreact to new domestic information due to overconfidence in their domestic private signals, but they demonstrate a conservative response to new information in foreign markets. Links between the private signals of partially informed agents may lead to correlated foreign investment strategies among such agents through social learning. We suggest the acquisition of private signals, along with the dissemination of information, affect international portfolio decision rules and are determinants of the phenomenon of home bias.

Keywords: Social learning; International asset allocation; Home bias; Prior beliefs; Observational learning (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11156-016-0560-6

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