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The Globalization of Information and Capital Mobility

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  • William H. Branson
  • Dwight M. Jaffee
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    Abstract

    This paper provides a framework for analyzing the effects of symmetric and asymmetric changes in information about risk on equilibrium real interest rate spreads across countries. Following the literature on parameter uncertainty, improvements in information are modeled as reductions in estimated variances. The equilibrium interest differential is determined in a two country setting. The effects of changes in information on the differential are shown in cases where (a) all investors have the same information, (b) home investors have superior information about home assets, and (c) all investors experience an improvement in information about one asset. An improvement in information on European assets in "Europe 1992" will raise the interest differential on U.S. assets relative to European as investors shift toward European assets.

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    File URL: http://www.nber.org/papers/w3496.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3496.

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    Date of creation: Feb 1992
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    Publication status: published as Accounting and Financial Globalization, edited by Joshua Ronen and Joshua Livnat, pp. 33-62. Westport, CT: Quorum Books, 1991.
    Handle: RePEc:nbr:nberwo:3496

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    1. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    2. Adler, Michael & Lehmann, Bruce, 1983. " Deviations from Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 38(5), pages 1471-87, December.
    3. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-34, September.
    4. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June.
    5. Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Jeffrey A. Frankel, 1989. "Quantifying International Capital Mobility in the 1980s," NBER Working Papers 2856, National Bureau of Economic Research, Inc.
    7. Brown, S., 1979. "The Effect of Estimation Risk on Capital Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(02), pages 215-220, June.
    8. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
    9. Jeffrey A. Frankel and Alan T. MacArthur., 1987. "Political vs. Currency Premia in International Real Interest Differentials: A Study of Forward Rates for 24 Countries," Economics Working Papers 8762, University of California at Berkeley.
    10. Fraga, Arminio, 1986. "Price uncertainty and the exchange-rate risk premium," Journal of International Economics, Elsevier, vol. 20(1-2), pages 179-185, February.
    11. William H. Branson & Dale W. Henderson, 1984. "The Specification and Influence of Asset Markets," NBER Working Papers 1283, National Bureau of Economic Research, Inc.
    12. Barry, Christopher B. & Brown, Stephen J., 1985. "Differential Information and Security Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 407-422, December.
    13. Ho, Thomas S. Y. & Michaely, Roni, 1988. "Information Quality and Market Efficiency," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(01), pages 53-70, March.
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