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The Determinants of Cross-Border Equity Flows: The Geography of Information

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Author Info
Richard Portes (London Business School)
Hélène Rey (London School of Economics)

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Abstract

We apply a new approach to a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. The model integrates elements of the finance literature on portfolio composition and the international macroeconomics and asset trade literature. Gross asset flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. Distance proxies some information costs, and other variables explicitly represent information transmission, an information asymmetry between domestic and foreign investors, and the efficiency of transactions. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information is the main determinant of the pattern of international transactions, while there is little support in our data for diversification and 'return-chasing' motives for transactions.

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Paper provided by Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley in its series Center for International and Development Economics Research, Working Paper Series with number 1011.

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Date of creation: 02 Jul 2000
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Handle: RePEc:cdl:ciders:1011

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Related research
Keywords: equity flows; cross-border portfolio investment; information asymmetries; gravity model;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "Characterizing Asymmetric Information in International Equity Markets," International Finance 0405005, EconWPA. [Downloadable!]
  2. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "International Equity Flows and Returns: A Quantitative Equilibrium Approach," International Finance 0405006, EconWPA. [Downloadable!]
    Other versions:
  3. Simonetta Rosati & Stefania Secola, 2005. "Explaining cross-border large-value payment flows - evidence from TARGET and EURO 1 data," Working Paper Series 443, European Central Bank. [Downloadable!]
  4. Shujing Li & Isabel K. Yan & Hamid Faruqee, 2004. "The Determinants of International Portfolio Holdings and Home Bias," IMF Working Papers 04/34, International Monetary Fund. [Downloadable!]
  5. Wei-Kang WONG, 2001. "How Good Are Embodied And Disembodied Idea Flows In Bridging Income Gaps And Idea Gaps?," Departmental Working Papers wp0102, National University of Singapore, Department of Economics. [Downloadable!]
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