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International Equity Flows and Returns: A Quantitative Equilibrium Approach

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  • Albuquerque, Rui
  • Bauer, Gregory
  • Schneider, Martin

Abstract

This paper reconsiders the role of foreign investors in developed country equity markets. It presents a quantitative model of trading that is built around two new assumptions about investor sophistication: (i) both the foreign and domestic populations contain investors with superior information sets; and (ii) these knowledgeable investors have access to both public equity markets and private investment opportunities. The model delivers a unified explanation for three stylized facts about US investors’ international equity trades: (i) trading by US investors occurs in waves of simultaneous buying and selling; (ii) US investors build and unwind foreign equity positions gradually; and (iii) US investors increase their market share in a country when stock prices there have recently been rising. The results suggest that heterogeneity within the foreign investor population is much more important than heterogeneity of investors across countries.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5159.

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Date of creation: Aug 2005
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Handle: RePEc:cpr:ceprdp:5159

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Keywords: asset pricing; asymmetric information; heterogenous investors; international equity flows; international equity returns;

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Citations

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Cited by:
  1. Roberto A. De Santis & Paul Ehling, 2007. "Do international portfolio investors follow firms’ foreign investment decisions?," Working Paper Series 815, European Central Bank.
  2. Emine Boz, 2006. "Can Miracles Lead to Crises? An Informational Frictions Explanation of Emerging Markets Crises," Computing in Economics and Finance 2006 19, Society for Computational Economics.
  3. Dunne, Peter & Hau, Harald & Moore, Michael, 2010. "International order flows: Explaining equity and exchange rate returns," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 358-386, March.
  4. Rui Albuquerque & Gregory Bauer & Martin Schneider, 2004. "Characterizing Asymmetric Information in International Equity Markets," International Finance 0405005, EconWPA.
  5. Albuquerque, Rui & Bauer, Gregor H & Schneider, Martin, 2006. "Global Private Information in International Equity Markets," CEPR Discussion Papers 5819, C.E.P.R. Discussion Papers.
  6. Albuquerque, Rui & de Francisco, Eva & Marques, Luis, 2006. "Marketwide Private Information in Stocks: Forecasting Currency Returns," CEPR Discussion Papers 5604, C.E.P.R. Discussion Papers.
  7. Juan Carlos Hatchondo, 2005. "Asymmetric information and the lack of international portfolio diversification," Working Paper 05-07, Federal Reserve Bank of Richmond.
  8. Emine Boz, 2009. "Can Miracles Lead to Crises? The Role of Optimism in Emerging Markets Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1189-1215, 09.
  9. Gregory H. Bauer & Clara Vega, 2006. "The monetary origins of asymmetric information in international equity markets," International Finance Discussion Papers 872, Board of Governors of the Federal Reserve System (U.S.).
  10. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2011. "U.S. International Equity Investment and Past and Prospective Returns," NBER Working Papers 16677, National Bureau of Economic Research, Inc.
  11. Emine Boz, 2005. "Do Miracles Lead to Crises?: An Informational Frictions Explanation to Emerging Market Financial Crises," 2005 Meeting Papers 496, Society for Economic Dynamics.
  12. Fratzscher, Marcel & Saborowski, Christian & Straub, Roland, 2010. "Monetary Policy Shocks and Portfolio Choice," CEPR Discussion Papers 8099, C.E.P.R. Discussion Papers.
  13. Stijn Van Nieuwerburgh & Laura Veldkamp, 2008. "Information Acquisition and Under-Diversification," NBER Working Papers 13904, National Bureau of Economic Research, Inc.
  14. Hasan F. Baklaci, 2007. "Do Foreign Investors chase or Impact Returns in Turkey?," Papers of the Annual IUE-SUNY Cortland Conference in Economics, in: Proceedings of the Conference on Globalization and Its Discontents, pages 22-39 Izmir University of Economics.
  15. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2011. "U.S. international equity investment and past prospective returns," International Finance Discussion Papers 1016, Board of Governors of the Federal Reserve System (U.S.).

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