Beyond Home Bias: International Portfolio Holdings and Information Heterogeneity

Review of Financial Studies (forthcoming)

81 Pages Posted: 6 Oct 2017 Last revised: 27 Aug 2021

See all articles by Filippo De Marco

Filippo De Marco

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; CEPR Financial Economics

Marco Macchiavelli

Board of Governors of the Federal Reserve System

Rosen Valchev

Boston College

Multiple version iconThere are 2 versions of this paper

Date Written: July 23, 2021

Abstract

We show that international portfolios reflect the underlying heterogeneity in investors' beliefs. Using data on foreign sovereign debt holdings of European banks matched with their forecasts on future bond yields, we find that expecting higher returns and having more accurate forecasts are associated with larger bond holdings. Crucially, the elasticity of portfolio holdings to expected returns is increasing in the precision of the forecast, implying that investors optimally exploit comparative advantages in information production. We rationalize the results in a model where partial information specialization arises endogenously by introducing some degree of unlearnable uncertainty about asset payoffs.

Keywords: International investment, Portfolio Choice, Expectations, Information choice

JEL Classification: F21, F36, G11, D82

Suggested Citation

De Marco, Filippo and Macchiavelli, Marco and Valchev, Rosen, Beyond Home Bias: International Portfolio Holdings and Information Heterogeneity (July 23, 2021). Review of Financial Studies (forthcoming), Available at SSRN: https://ssrn.com/abstract=3048344 or http://dx.doi.org/10.2139/ssrn.3048344

Filippo De Marco (Contact Author)

Bocconi University - Department of Finance ( email )

Department of Finance
Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

CEPR Financial Economics ( email )

London
United Kingdom

Marco Macchiavelli

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Rosen Valchev

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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