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
CEPR Discussion Paper No. 5159
This paper reconsiders the role of foreign investors in developed country equity markets. It presents a quantitative model of trading that is built around two new assumptions about investor sophistication: (i) both the foreign and domestic populations contain investors with superior information sets; and (ii) these knowledgeable investors have access to both public equity markets 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 waves of simultaneous buying and selling; (ii) US investors 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: 55
Keywords: Asymmetric information, heterogenous investors, asset pricing, international equity flows, international equity returns
JEL Classification: F30, G12, G14, G15working papers series
Date posted: August 18, 2005
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