The Information Content of International Portfolio Flows

Abstract

This paper attempts to attribute the forecasting power of international portfolio flows for local equity market returns to either better information about fundamentals or price pressure. Price pressure is a potential explanation of the observed forecasting power because flows have positive contemporaneous price impact effects and are strongly positively autocorrelated. We find evidence that observed forecasting power is due predominately to information and only slightly due to price pressure in the foreign market. We control for country fundamentals by using closed-end fund prices, as traded in New York. Interestingly, the flows into the closed-end funds themselves (rather than the cross-border flows into the underlying NAVs) seem to forecast more negative returns in closed-end fund prices than in country NAVs. So while there is no apparent information in closed-end fund flows, there is some evidence that price pressure is present in closed-end fund prices.

Keywords: International investment, investor behavior, portfolio investment, portfolio flows

JEL Classification: G15, F21, G11