On Asymmetric Information across Countries and the Home-Bias Puzzel

Egil Matsen

Working Paper Series from Department of Economics, Norwegian University of Science and Technology

Abstract: This paper investigates the allocation decision of an investor who owns two projects, a domestic and a foreign one. A manager governs the expected return from each project, and the investor has less information on the actions of the foreign manager. The investor’s portfolio will be tilted relative to a situation with full information. With asymmetric information, he generally achieves a better risk-return characteristic of his net terminal wealth with an allocation different from full diversification, because a biased allocation can be beneficial to the managers’ efforts and/or risk properties of the optimal contracts. However, numerical simulations illustrate that, in general, the portfolio bias is small for plausible parameter values, and theoretically it may even be towards the foreign project. This weakens the case for asymmetric information as a prime reason for the observed home-bias in portfolio allocation.

Keywords: Asymmetric information; portfolio selection (search for similar items in EconPapers)
JEL-codes: D81 D82 G11 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2001-07-15
New Economics Papers: this item is included in nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:nst:samfok:0202

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