DP5159 International Equity Flows and Returns: A Quantitative Equilibrium Approach
|Author(s):||Rui Albuquerque, Gregory Bauer, Martin Schneider|
|Publication Date:||August 2005|
|Keyword(s):||asset pricing, asymmetric information, heterogenous investors, international equity flows, international equity returns|
|JEL(s):||F30, G12, G14, G15|
|Programme Areas:||International Macroeconomics, Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5159|
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.