Wealth Heterogeneity, Information Acquisition and Equity Home Bias : Evidence from U.S. Household Surveys of Consumer Finance

The well-known equity home bias has two components: an extensive and intensive margin. Using U.S. household portfolio data, we find that the decision to participate in foreign stock markets depends on investor's wealth, with richer investors more likely to participate (the extensive margin). We document a new finding: as investor wealth increases, the portfolio share invested in foreign equities tends to decrease (the intensive margin). A noisy rational expectations equilibrium model with wealth heterogeneity, domestic and foreign entry costs and endogenous information acquisition can generate the new negative relationship, and help explain the U.S. equity home bias along both margins