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Familiarity and Surprises in International Financial Markets: Bad news travels like wildfire, good news travels slow

  • Jordi Mondria

    (University of North Carolina at Chapel H)

  • Thomas Wu

    (University of California, Santa Cruz)

In this paper, we decompose attention allocation in two components -- the familiar and the surprising -- with opposite implications for US purchases of foreign stocks. On one hand, familiarity-induced attention leads to an increase in US holdings of foreign equities. On the other hand, surprise-induced attention is associated with net selling of foreign stocks because US investors' tend to pay more attention to negative than to positive economic surprises from other countries. Our findings suggest that information asymmetries between locals and non-locals are more pronounced when it comes to good news, with information regarding bad news being relatively symmetric.

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File URL: https://economicdynamics.org/meetpapers/2012/paper_50.pdf
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Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 50.

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Date of creation: 2012
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Handle: RePEc:red:sed012:50
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
  2. Stijn Van Nieuwerburgh & Laura Veldkamp, 2009. "Information Immobility and the Home Bias Puzzle," Journal of Finance, American Finance Association, vol. 64(3), pages 1187-1215, 06.
  3. Portes, Richard & Rey, Hélène, 1999. "The Determinants of Cross-Border Equity Flows," CEPR Discussion Papers 2225, C.E.P.R. Discussion Papers.
  4. Christopher J. Malloy, 2005. "The Geography of Equity Analysis," Journal of Finance, American Finance Association, vol. 60(2), pages 719-755, 04.
  5. Mondria, Jordi & Wu, Thomas, 2010. "The puzzling evolution of the home bias, information processing and financial openness," Journal of Economic Dynamics and Control, Elsevier, vol. 34(5), pages 875-896, May.
  6. Nikolaus Hautsch & Dieter Hess, 2002. "The Processing of Non-Anticipated Information in Financial Markets: Analyzing the Impact of Surprises in the Employment Report," Review of Finance, European Finance Association, vol. 6(2), pages 133-161.
  7. Kraay, Aart & Loayza, Norman & Servén, Luis & Ventura, Jaume, 2001. "Country Portfolios," CEPR Discussion Papers 2974, C.E.P.R. Discussion Papers.
  8. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
  9. Jennifer Conrad & Bradford Cornell & Wayne R. Landsman, 2002. "When Is Bad News Really Bad News?," Journal of Finance, American Finance Association, vol. 57(6), pages 2507-2532, December.
  10. Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March.
  11. Dahlquist, Magnus & Pinkowitz, Lee & Stulz, René M. & Williamson, Rohan, 2003. "Corporate Governance and the Home Bias," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 87-110, March.
  12. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
  13. Joshua D. Coval & Tobias J. Moskowitz, 2001. "The Geography of Investment: Informed Trading and Asset Prices," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 811-841, August.
  14. Jordi Mondria & Thomas Wu & Yi Zhang, 2008. "The Determinants of International Investment and Attention Allocation: Using Internet Search Query Data," Working Papers tecipa-326, University of Toronto, Department of Economics.
  15. Thomas Wu & Jordi Mondria, 2011. "Asymmetric Attention and Stock Returns," 2011 Meeting Papers 134, Society for Economic Dynamics.
  16. Zhi Da & Joseph Engelberg & Pengjie Gao, 2011. "In Search of Attention," Journal of Finance, American Finance Association, vol. 66(5), pages 1461-1499, October.
  17. Bekaert, Geert, 1995. "Market Integration and Investment Barriers in Emerging Equity Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 75-107, January.
  18. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
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