Endogenous Acquisition of Information and The Equity Home Bias

This paper investigates the extent to which differences in information costs can explain the equity home bias puzzle. In a model where the cost of acquiring information regarding the Foreign asset is higher than for the Home asset, we show that–if cost functions are convex–the expected size of the equity home bias in terms of differences in invested amounts is positive and increasing in expected excess returns and risk, but decreasing in risk aversion. However, a calibration to US data suggests that the information cost explanation accounts only for a small fraction of the observed equity home bias.