Working Paper: NBER ID: w16726
Authors: Bernard Dumas; Karen K. Lewis; Emilio Osambela
Abstract: We develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information content in public signals. We determine how informational advantages by domestic investors in the interpretation of home public signals impact equity markets. We evaluate the ability of our model to generate four international finance anomalies: (i) the co-movement of returns and capital flows; (ii) home-equity preference; (iii) the dependence of firm returns on home and foreign factors; and (iv) abnormal returns around foreign firm cross- listing in the home market. Their relationships with empirical differences-of-opinion proxies are consistent with the model.
Keywords: Differences of opinion; International equity markets; Investor behavior; Capital flows; Asset pricing anomalies
JEL Codes: F3; G11; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| differences in the interpretation of public signals by domestic and foreign investors (F21) | comovement of returns and capital flows (F32) |
| home investors interpret signals positively (G41) | prices increase (E30) |
| home equity preference (G51) | home investors favor domestic over foreign equities (G15) |
| perceived risks associated with foreign assets (G15) | home equity preference (G51) |
| dependence of firm returns on home and foreign factors (F23) | abnormal returns around cross-listing events (G14) |
| differences of opinion (D80) | observed market phenomena (D40) |