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International Equity Flows and Returns: A Quantitative Equilibrium Approach

Listed author(s):
  • Albuquerque, Rui
  • Bauer, Gregory
  • Schneider, Martin

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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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
Handle: RePEc:cpr:ceprdp:5159
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