Working Paper: CEPR ID: DP5819
Authors: Rui Albuquerque; Gregory H. Bauer; Martin Schneider
Abstract: 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.
Keywords: Asymmetric Information; Global Private Information; Home Bias; International Equity Flows; Returns; Portfolio Choice; Private Information; Return Chasing
JEL Codes: F36; G12; G14; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global private information (D82) | US investors' trading behavior (G41) |
| global private information (D82) | positive comovement of US investors' net purchases with returns in various countries (G15) |
| US investors' net purchases in foreign markets (F21) | returns in those markets (G10) |
| global private information (D82) | similar trading patterns among US investors in different markets (G15) |
| local factors (F29) | underreaction of local investors to global factors (G15) |
| underreaction of local investors to global factors (G15) | US investors' information advantage (G14) |