DP5819 Global Private Information in International Equity Markets

Author(s):	Rui Albuquerque, Gregory H Bauer, Martin Schneider
Publication Date:	September 2006
Keyword(s):	asymmetric information, global private information, home bias, international equity flows and returns, portfolio choice, private information, return chasing
JEL(s):	F36, G12, G14, G15
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=5819

This paper studies international equity markets when some investors have private information that is valuable for trading in many countries simultaneously. We use a dynamic model of equity trading to show that 'global' private information helps understand US investors? trading behaviour and performance. In particular, the model predicts global return chasing - positive comovement of US investors? net purchases with returns in many countries - which we show to be present in the data. Return chasing in our model can be due to superior performance of US investors, not inferior knowledge or naive trend-following. We also show that trades due to private information are strongly correlated across countries: a common 'global' factor accounts for about half their variation.