Economics at your fingertips  

The Role of Human Capital in Imperfectly Informed International Financial Markets

Isaac Ehrlich () and Jong Shin

No 92010, Working Papers from Hong Kong Institute for Monetary Research

Abstract: The paper's point of departure is that the information content of financial asset prices is formed partly through search for private information by individuals or investor groups, rather than gleaned exclusively from observed asset prices. Differences in the efficiency of search for information signals and in the opportunity costs involved lead to asymmetries in private information precision across investors and to variations in the price information content of traded assets. Our model links these variables to the level of prior knowledge, or "general human capital" investors possess concerning all traded assets, as well as idiosyncratic knowledge, or "specific human capital" associated with specific assets. In this context, the paper extends and generalizes the approach offered in Ehrlich, Hamlen and Yin (2008). Pursuing a rational-expectations-equilibrium model of noisy prices with multiple assets and heterogeneous investors, we apply this model to explain the observed diversity in the degree of concentration of financial portfolios in domestic, relative to foreign assets across countries - what the literature has termed "home bias". Our model predicts that while conditional increments in general human capital, proxied by schooling, monotonically increase the expected absolute holdings of both home and foreign stocks, "home bias" at the market level is an inverted-U function of schooling. Symmetrically opposite results are predicted concerning the impact of variations in the opportunity costs of information production, proxied by individual labor market wages. We test these predictions against aggregate market data concerning the compositions of aggregate portfolios across 23 countries over a 7-year period (2001-07). The results strongly support our discriminating hypotheses. A related, and more extensive, empirical investigation is contained in Ehrlich, Shin, and Yin (2010).

Pages: 13 pages
Date: 2010-04
New Economics Papers: this item is included in nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link) (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found ( [301 Moved Permanently]--> [301 Moved Permanently]-->

Related works:
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:

Access Statistics for this paper

More papers in Working Papers from Hong Kong Institute for Monetary Research Contact information at EDIRC.
Bibliographic data for series maintained by HKIMR ().

Page updated 2024-04-08
Handle: RePEc:hkm:wpaper:092010