Information Immobility and the Home Bias Puzzle: Technical Appendix for Supplements and Data Section of www.afajof.org

This technical appendix is comprised of three sections. The first provides step-by-step mathematical guidance on how to solve the model. It derives expected utility, expected portfolio holdings, the strategic substitutability and equilibrium uniqueness results, and the cost of foreign information in the model without increasing returns. The second section explores the model’s assumptions. It looks at the foundations for expected mean-variance preferences; it allows investors to choose how much to learn, and it considers investors who can learn about risk factors other than principal components. The third section derives the formal links between the theory’s predictions and the empirical evidence we offer in its support. Exploring these links also reveals why some findings that that purportedly refute the information-based explanation for under-diversification are not, in fact, inconsistent with the predictions of a rational information-based theory.