Many argue that home bias arises because home investors can predict home asset payoffs more accurately than foreigners can. But why doesn't global information access eliminate this asymmetry? We model investors, endowed with a small home information advantage, who choose what information to learn before they invest. Surprisingly, even when home investors can learn what foreigners know, they choose not to: Investors profit more from knowing information others do not know. Learning amplifies information asymmetry. The model matches patterns of local and industry bias, foreign investments, portfolio out-performance and asset prices. Finally, we propose new avenues for empirical research.JEL classification: F30, F40, D82.

This section shows that the equilibrium of the action game in section 1 of the main text is unique.It does that by adapting an argument first made Angeletos and Pavan (2007, propositions 1 and 3) to our environment. The idea of the proof is that there is a social planner problem such that every equilibrium of our model is also a solution to this planning problem. The planning problem is strictly convex, meaning that it has a unique minimum. Since the planning problem has a unique solution and every equilibrium is a solution to the planning problem, the equilibrium of the model must be unique.We begin by setting up some notation for the proof. We letp (·) denote the candidate equilibrium function characterized by equation (4) in the main text, and will make use of the fact that s = b ω. We let F (ω) denote the prior distribution of ω, with density f (ω). We let µ denote the distribution of the agents' information choices, and φ (Xz|ω) the distribution of observed signals, conditional on the state ω. Together, µ and φ determine the distribution F (I|ω)of information sets I = (χ, Xz), conditional on the state ω. The agents' posterior beliefs conditional on I are defined by the pdfφ.Proposition 1 Let P denote the set of functions p for which

Traditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This model generates high covariance within a rational expectations framework by introducing markets for information about asset payoffs. When information is costly, rational investors will not buy information about all assets; they will learn about a subset. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. A price that declines in quantity makes investors want to purchase a common subset of information. If investors price many assets using a common subset of information, then a shock to one signal is passed on as a common shock to many asset prices. These common shocks to asset prices generate 'excess covariance.' The cross-sectional and time-series properties of asset price covariance are consistent with this explanation. * lveldkam@stern.nyu.edu, NYU Stern, Economics Department, 44 West 4th St., 7th floor, New York, NY 10012. Thanks to David Backus, Guido Lorenzoni, Thomas Sargent, Martin Schneider, Stijn Van Nieuwerburgh, Bernie Yeung, Gunter Strobl, and seminar participants at NYU, Rutgers, 2004 EFA meetings, Gerzensee summer symposium, and the 2004 SED meetings for helpful comments and conversations. Thanks also to Elif Sisli for her capable research assistance. JEL classification: D82, G14, G12.

We propose a new definition of skill as general cognitive ability to pick stocks or time the market. We find evidence for stock picking in booms and market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that weighs a fund's market timing more in recessions and stock picking more in booms. The measure displays more persistence than either market timing or stock picking alone and predicts fund performance.

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