The Determinants of Cross-Border Equity Flows

London Business School Economics Discussion Paper No. DP 2001/7

42 Pages Posted: 4 Dec 2001

See all articles by Richard Portes

Richard Portes

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Hélène Rey

London Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2001

Abstract

We explore a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. We show that a "gravity" model explains international transactions in financial assets at least as well as goods trade transactions. Gross transaction flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. distance proxies some information costs, and other variables explicitly represent information transmission, an information asymmetry between domestic and foreign investors, and the efficiency of transaction. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information is the main determinant of the pattern of international transactions, while there is weak support in our data for the diversification motive, once we control for the informational friction. We strengthen our conclusions by investigating - in another data set - the ability of our information variables to explain transactions in classes of assets with different informational content (corporate bonds, equities and government bonds). Finally, we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings.

JEL Classification: F36, F21, F12, G11

Suggested Citation

Portes, Richard and Rey, Helene, The Determinants of Cross-Border Equity Flows (July 2001). London Business School Economics Discussion Paper No. DP 2001/7. Available at SSRN: https://ssrn.com/abstract=291780 or http://dx.doi.org/10.2139/ssrn.291780

Richard Portes (Contact Author)

London Business School - Department of Economics ( email )

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HOME PAGE: http://faculty.london.edu/rportes/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Helene Rey

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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