Discussion Paper Details

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Title: International Equity Flows and Returns: A Quantitative Equilibrium Approach

Author(s): Rui Albuquerque, Gregory Bauer and Martin Schneider

Publication Date: August 2005

Keyword(s): asset pricing, asymmetric information, heterogenous investors, international equity flows and international equity returns

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: 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.

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Bibliographic Reference

Albuquerque, R, Bauer, G and Schneider, M. 2005. 'International Equity Flows and Returns: A Quantitative Equilibrium Approach'. London, Centre for Economic Policy Research.