Working Paper: CEPR ID: DP5159
Authors: Rui Albuquerque; Gregory Bauer; Martin Schneider
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.
Keywords: Asset Pricing; Asymmetric Information; Heterogeneous Investors; International Equity Flows; International Equity Returns
JEL Codes: F30; G12; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. investors exhibit flow momentum (F21) | additional purchases in subsequent quarters (D25) |
| U.S. investors increase their market share in foreign countries (F23) | stock prices are rising (G17) |
| positive market performance (G14) | increased investment activity (E22) |
| within-country heterogeneity among U.S. investors (G59) | waves of gross trading activity (E32) |
| sophisticated investors' ability to locate profitable opportunities (G11) | trading decisions (G11) |
| trading decisions (G11) | market flows and returns (G19) |