Information Asymmetries, Common Factors, and International Portfolio Choice



We propose a rational expectations equilibrium model in which agents are asymmetrically informed about both asset-specific components of payoffs and common factors that affect payoffs. The model produces closed-form solutions for asset prices and investor holdings (positions). We apply the model to a study of international portfolio choice. Low levels of asset-specific information and high levels of information about common (cross-border) factors can lead investors in one country to overweigh stocks from other countries—a phenomenon called “reverse home bias”. We empirically analyzing cross-border mutual fund holdings of 5,781 stocks from 21 developed countries and find broad support for our model’s implications.
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Ingolf Dittmann