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Beyond Home Bias: Portfolio Holdings and Information Heterogeneity

Filippo De Marco, Marco Macchiavelli and Rosen Valchev

No 942, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We investigate whether information frictions are important determinants of banks’ sovereign debt portfolios. Going beyond the classic home versus foreign distinction in holdings, we study the heterogeneity within the foreign sovereign portfolio. First, we propose a modified version of the Van Nieuwerburgh and Veldkamp (2009) model with a two-tiered information structure that links portfolio holdings and information acquisition. Second, we find strong support for the key predictions of the model in the data: if a bank makes a forecast for a given country, it is more likely to hold debt of that country. Moreover, more optimistic and more precise forecasts predict larger portfolio holdings.

Keywords: Home bias; Information frictions; Portfolio choice; Banks (search for similar items in EconPapers)
JEL-codes: G11 G21 F30 (search for similar items in EconPapers)
Date: 2018-01-09
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