Global Private Information in International Equity Markets

Abstract:     
This paper studies international equity markets when some investors have private information that is valuable for trading in many countries simultaneously. We use a dynamic model of equity trading to show that "global" private information helps understand US investors' trading behavior and performance. In particular, the model predicts global return chasing -- positive comovement of US investors' net purchases with returns in many countries -- which we show to be present in the data. Return chasing in our model can be due to superior performance of US investors, not inferior knowledge or naive trend-following. We also show that trades due to private information are strongly correlated across countries: a common "global" factor accounts for about half their variation.

Number of Pages in PDF File: 54

Keywords: Private information, global private information, asymmetric information, portfolio choice, international equity flows and returns, home bias, return chasing

JEL Classification: F36, G12, G14, G15

working papers series