a b s t r a c tThis paper explores the joint determination of home bias and attention allocation. We overcome the typical challenge associated with evaluating attention allocation theories by using a new internet search query dataset to measure how much information investors decide to process. Employing an instrumental variables approach, we find empirical evidence of a two-way causality between home bias and attention. Our estimates suggest that if all countries were to receive the same level of attention as the U.S., then the average home bias by U.S. investors would fall from 85.2% to 57.3%.

This paper constructs a new measure of attention allocation by local investors relative to nonlocals using aggregate search volume from Google. We first present a conceptual framework in which local investors optimally choose to focus their attention on local stocks when they receive private news, leading to an asymmetric allocation of attention between local and nonlocal investors. Consistent with the main prediction of this framework, we find that firms attracting abnormally high asymmetric attention from local relative to nonlocal investors earn higher returns. A portfolio that goes long in stocks with high asymmetric attention and short in stocks with low asymmetric attention has an alpha of 32 basis points per month. The results are stronger for stocks with a greater degree of information friction. The new measure of asymmetric attention allows one to infer the arrival of unobservable private information by observing investors’ attention allocation behavior. This paper was accepted by Karl Diether, finance.

The impact of news surprises on exchange rates depends in principle upon a number of factors including the state of the economy, institutional setting and nature of the expected policy response. These characteristics may lead to state-contingent asymmetric responses to news. In this paper we investigate the possible asymmetric response of intraday exchange rates (5-minute intraday JPY/USD) to macroeconomic news announcements during a very unusual period-Japan during 1999-2006 when the money market interest rate was effectively zero. We may think of this period as a "natural experiment" consisting of an institutional setting when interest rates may rise but not decline, thereby constraining both endogenous policy reactions to news and private market expectations. Asymmetric responses to news, to the extent that they are important in exchange rate markets as they are in equity markets, would seem particularly likely to be evident during this period. We consider several ways asymmetric responses may be manifested and linked to macroeconomic news during the zero-interest rate period. We assess whether the intraday exchange rate responds differently depending on whether the news is emanating from Japan or the U.S; we consider the state of the business cycle; and we distinguish between "good" and "bad" news.

This paper presents a rational expectations model of asset prices with rationally inattentive investors that, unlike previous papers, can explain both the substantial amount of equity wealth invested domestically and the puzzling time series behavior of the home bias -an initial plateau before 1985, then a decrease until 1994 followed by stabilization on another plateau. When there is a …nancial liberalization, investors exploit past information to predict current asset payo¤s. The resulting endogenous local information advantage generates a gradual decrease of the home bias until its steady state. In the long run, the home bias remains large due to the interaction of the optimal attention allocation with the optimal portfolio choice. Using measures for information capacity, informational advantages and …nancial openness as explanatory variables, we are able to explain at least 46.8% of the variation of the home bias for 19 developed countries from 1988 until 2004.Our estimates show that both variables are signi…cant, with home bias decreasing with …nancial openness and increasing with information capacity, as predicted by our model.

Este artigo explora duas alterações nos modelos tradicionais para o coeficiente de repasse do câmbio para a inflação. A primeira é uma especificação não-linear, sendo função de variáveis que refletem o efeito de condições da economia. A segunda alteração é que o repasse não é mensurado apenas pelo coeficiente estimado para o índice de inflação agregado, mas também usando-se grupos de preços dentro dos quais o mecanismo de repasse cambial pode ser mais homogêneo. A evidência empírica obtida no período entre o terceiro trimestre de 1994 e o último trimestre de 2001 sugere a existência de diferentes mecanismos não-lineares de repasse entre os diferentes grupos de preços.