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ASYMMETRIC INFORMATION AND THE LACK OF PORTFOLIO DIVERSIFICATION *
Author(s) -
Carlos Hatchondo Juan
Publication year - 2008
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2008.00513.x
Subject(s) - diversification (marketing strategy) , portfolio , economics , equity (law) , financial economics , stock (firearms) , information asymmetry , microeconomics , stock market , econometrics , business , marketing , mechanical engineering , political science , law , engineering , paleontology , horse , biology
There is pervasive evidence that individuals invest primarily in local stocks and thus hold poorly diversified portfolios. The present article develops a theoretical model in which the presence of informational asymmetries introduces home equity bias. The main departure from previous theoretical work is the assumption that local investors outperform nonlocal investors in identifying the correct ranking of local investment opportunities, instead of possessing superior information about the aggregate performance of the local stock market. The second key assumption is based on the evidence that short‐selling is a costly activity.