Differences of Opinion and International Equity Markets
INSEAD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
Karen K. Lewis
University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)
Carnegie Mellon University - David A. Tepper School of Business
July 1, 2011
INSEAD Working Paper No. 2011/77/FIN
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
Date posted: July 1, 2011
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