International Equity Flows and Returns: A Quantitative Equilibrium Approach
Rui A. Albuquerque
Boston University - School of Management; Católica-Lisbon School of Business and Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Gregory H. Bauer
Bank of Canada
European Central Bank (ECB) Research Paper Series, Forthcoming
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, G15working papers series
Date posted: May 18, 2004
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