Beyond Home Bias: International Portfolio Holdings and Information Heterogeneity
Review of Financial Studies (forthcoming)
81 Pages Posted: 18 Dec 2017 Last revised: 27 Aug 2021
Date Written: July 23, 2021
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: Suggested Citation