The role of human capital in imperfectly informed asset markets
Shin, Jong Kook
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Although information asymmetry is gaining ground as the single most plausible explanation of home bias, little testable research has been done to analyze how such an information differential is formed and sustained in an efficient asset market. By extending the testable model of endogenous information pioneered by Ehrlich et al. (2008) to an economy with multiple risky assets, I develop new predictions concerning the diversity in "home bias" or portfolio concentration across different individuals and countries as a function of observable determinants of endogenous information asymmetry such as years of schooling and the wage rate or opportunity cost of asset management. Using international samples covering 23 countries over the peirod 2001 ∼ 2007, I test theoretical predictions of the model and find strong supportive evidence. Then I provide an overview of the implications of this framework not empirically exploited in this contribution. They include a novel account concerning "flight-to-familiarity", volatility contagion and price disconnect. Finally, I suggest a strategy to estimate a measure that can rank-order the price information content (PIC) for future empirical work.