Highlights

Equity home bias occurs along both extensive and intensive margins.

Wealthy US households are more likely to participate in the foreign stock market.

As investor wealth increases, portfolio share invested in foreign equities decreases.

Overall international diversification is increasing with wealth.

A noisy rational expectations equilibrium model with wealth heterogeneity, entry costs, and information processing can explain both margins.

Abstract

The well-known equity home bias has two components: an extensive and intensive margin. Using data on direct stock holdings of U.S. households, we find that the decision to participate in foreign stock markets depends on investor wealth, with richer investors more likely to participate (the extensive margin). We document a new finding: as investor wealth increases, the portfolio share invested in foreign equities tends to decrease (the intensive margin). A noisy rational expectations equilibrium model with wealth heterogeneity, entry costs, and endogenously chosen information processing capacity can generate the new negative relationship and help understand the U.S. household equity home bias along both margins.

Keywords

Equity home bias; Extensive and intensive margins; Information acquisition; Entry cost; Wealth heterogeneity

Source: https://www.sciencedirect.com/science/article/pii/S0378426621000583?dgcid=author