Home bias and high turnover in an overlapping generations model with learning

Massimo Guidolin

No 2005-012, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper develops a two-country OLG model under the assumption that investors are on a Bayesian learning path. While investors from both countries receive identical information flows, domestic investors start off with less precise prior beliefs concerning foreign fundamentals. On a learning path, differences in beliefs and estimation risk generate portfolio biases similar to those observed empirically: home bias in equity portfolios and trend-chasing in international flows. In addition, due to the higher volatility of the estimates of foreign state variables, our model produces excessive turnover in foreign securities as reported by Tesar and Werner (1995). We use real GDP data for the US and Europe to calibrate the model and produce simulations that show that under the assumption of a financial liberalization during the 1970s, substantial home bias and excess turnover should have been observed in the subsequent years.

Keywords: International finance; Investments (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-cmp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published in Review of International Economics, September 2005, 13(4), pp. 725-56

Downloads: (external link)
https://s3.amazonaws.com/real.stlouisfed.org/wp/2005/2005-012.pdf Full text (application/pdf)

Related works:
Journal Article: Home Bias and High Turnover in an Overlapping‐generations Model with Learning (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2005-012

Ordering information: This working paper can be ordered from

DOI: 10.20955/wp.2005.012

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of St. Louis Contact information at EDIRC.
Bibliographic data for series maintained by Scott St. Louis ().