Information Diffusion in International Markets

Information is costly to acquire in trade and financial markets, especially across international borders. Sellers and buyers rely on information and experiences of other firms, including from business partners located in other countries. This Paper identifies three channels through which information is disseminated in the import and equity markets of 14 OECD countries. The first channel consists of information spillovers from the commercial to the financial markets and vice-versa. We found strong evidence in support of the first direction and some for the reverse, suggesting that traders use common information, frequently from the same sources such as financial intermediaries or banks. The second and third channels emphasize seller and buyer reputation in third markets. While these two channels are equally important in explaining bilateral import flows, buyer reputation appears to be of greater importance for equity flows. All three channels may help better explain contagion effects across markets and countries.