Beyond Home Bias: International Portfolio Holdings and Information Heterogeneity

Filippo De Marco, Marco Macchiavelli and Rosen Valchev

The Review of Financial Studies, 2022, vol. 35, issue 9, 4387-4422

Abstract: We show that international portfolios reflect the underlying heterogeneity in investors’ beliefs. Using data on the foreign sovereign debt holdings of European banks matched with their forecasts on future bond yields, we find that expecting higher returns and having more accurate forecasts are associated with larger bond holdings. Crucially, the elasticity of portfolio holdings to expected returns is increasing in the precision of the forecast, implying that investors optimally exploit comparative advantages in information production. We rationalize the results in a model in which partial information specialization arises endogenously by introducing a degree of unlearnable uncertainty about asset payoffs.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

JEL-codes: D82 F21 F36 G11 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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