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International Equity Flows and Returns: A Quantitative Equilibrium ApproachRui A. AlbuquerqueBoston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) Gregory H. BauerBank of Canada Martin SchneiderIndependent July 2005 European Central Bank (ECB) Research Paper Series, Forthcoming Abstract: This paper considers the role of foreign investors in developed-country equity markets. It presents a quantitative model of trading that is built around two new assumptions: (i) both the foreign and domestic investor populations contain investors of different sophistication, and (ii) investor sophistication matters for performance in both public equity 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 bursts of simultaneous buying and selling, (ii) Americans 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.
Number of Pages in PDF File: 52 Keywords: Asymmetric information, heterogenous investors, asset pricing, international equity flows, international equity returns. JEL Classification: F30, G12, G14, G15 working papers seriesDate posted: May 18, 2004Suggested CitationContact Information
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