Differences of Opinion and International Equity Markets

Abstract:     
We develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information in economic signals. Similar to models of asymmetric information, we consider how informational advantages by domestic investors about local output impacts equity markets. In contrast to these models, however, all information is publicly available, but domestic investors are better equipped to understand the information in local news. We show that our model can help explain four standard international pricing anomalies: (i) home equity preference; (ii) the co-movement of returns and international capital flows; (iii) the dependence of firm returns on local and foreign factors; and (iv) abnormal returns around foreign firm cross-listing in the local market.

Number of Pages in PDF File: 57

working papers series