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Imperfect financial integration and asymmetric information: competing explanations of the home bias puzzle?

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  • Jordi Mondria
  • Thomas Wu

Abstract

This paper shows that imperfect financial integration and informational asymmetries are not competing theories but rather complementary ideas to a single explanation of the home bias puzzle. We develop a rational expectations model of asset prices with investors that face informational constraints and find that informational advantages arise endogenously as a response to small financial frictions. We also present empirical evidence that (i) international financial frictions are correlated to observed patterns of US investors' attention and that (ii) the attention US investors allocate to foreign stocks helps explain home bias towards those countries, even after controlling for financial integration levels.

Suggested Citation

  • Jordi Mondria & Thomas Wu, 2013. "Imperfect financial integration and asymmetric information: competing explanations of the home bias puzzle?," Canadian Journal of Economics, Canadian Economics Association, vol. 46(1), pages 310-337, February.
    • Handle: RePEc:cje:issued:v:46:y:2013:i:1:p:310-337
    DOI: 10.1111/caje.12013
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    Citations

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    Cited by:

    1. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2015. "Education and the local equity bias around the world," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 65-88.
    2. Hallwood, Paul & MacDonald, Ronald, 2014. "Picking the Right Budget Constraint for Scotland," SIRE Discussion Papers 2015-27, Scottish Institute for Research in Economics (SIRE).
    3. G. Andrew Karolyi & David T. Ng & Eswar S. Prasad, 2013. "The Coming Wave," Working Papers 082013, Hong Kong Institute for Monetary Research.
    4. Glick, Reuven & Hutchison, Michael, 2013. "China's financial linkages with Asia and the global financial crisis," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 186-206.
    5. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2014. "The role of education in equity portfolios during the recent financial crisis," SIRE Discussion Papers 2015-26, Scottish Institute for Research in Economics (SIRE).
    6. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2015. "Education and the local equity bias around the world," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-76, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Bose, Udichibarna & MacDonald, Ronald & Tsoukas, Serafeim, 2014. "The role of education in equity portfolios during the recent financial crisis," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-26, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Mondria, Jordi & Wang, Xin & Wu, Thomas, 2021. "Familiarity and Surprises in International Financial Markets: Bad news travels like wildfire; good news travels slow," Journal of International Money and Finance, Elsevier, vol. 115(C).
    9. Ma, Yao & Yang, Baochen & Su, Yunpeng, 2021. "Stock return predictability: Evidence from moving averages of trading volume," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    10. Bonga-Bonga, Lumengo & Manguzvane, Mathias Mandla, 2023. "Stock market correlation and geographical distance: does the degree of economic integration matter?," MPRA Paper 116476, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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