Are Foreign Investors Better Informed? Evidence from the Return - Volume Relationship
38 Pages Posted: 11 Jul 2002
Date Written: July 2002
Abstract
I investigate whether foreign investors are better informed than domestic in the framework of a rational expectations model with informed and uninformed traders as outlined by Llorente, Michaely, Saar, and Wang (2002). The paper analyzes the model implication that an increase in the fraction of informed traders reduces the return autocorrelation following high trading volume, and relates the conditional daily return autocorrelation to the level of foreign portfolio investment and the degree of investor protection in 34 countries. Using U.S. portfolio holdings in those markets to proxy for foreign portfolio investment, the hypothesis that foreign investors are better informed than domestic is rejected for economies with low private property rights. This result is consistent with the view put forth by Morck, Yeung, and Yu (2000) that informed risk arbitrage is more likely to be discouraged in countries that do not meet minimal standards of property rights.
Keywords: international investment, investor behavior
JEL Classification: G14, G15, G20
Suggested Citation: Suggested Citation
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