No. 2/2002
ON ASYMMETRIC INFORMATION ACROSS COUNTRIES AND THE HOME-BIAS PUZZLE
Egil Matsen
Abstract
This paper investigates the allocation decision of an investor who owns
two projects, a domestic and a foreign one. A manager governs the expected
return from each project, and the
investor has less information on the actions of the foreign manager. The
investors portfolio will be tilted relative to a situation with
full information. With asymmetric information, he
generally achieves a better risk-return characteristic of his net terminal
wealth with an allocation different from full diversification, because
a biased allocation can be beneficial to the managers
efforts and/or risk properties of the optimal contracts. However, numerical
simulations illustrate that, in general, the portfolio bias is small for
plausible parameter values, and theoretically it may even be towards the
foreign project. This weakens the case
for asymmetric information as a prime reason for the observed home-bias
in portfolio allocation.
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