Working Paper: NBER ID: w9000
Authors: John M. Griffin; Federico Nardari; Ren M. Stulz
Abstract: In a model that is consistent with the existence of a home bias and with foreign investors that are less informed than domestic investors, we show that unexpectedly high worldwide returns lead to net equity inflows into small countries. In addition, a small country experiences net equity inflows when its stocks earn unexpectedly high returns. We investigate these predictions using daily data on net equity flows for nine emerging market countries and find that equity flows are positively related to host country stock returns as well as market performance abroad. Both our theoretical model and our empirical analysis show that global stock return performance is an important factor in understanding equity flows.
Keywords: equity flows; stock returns; emerging markets; home bias
JEL Codes: G11; G15; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unexpectedly high worldwide stock returns (G15) | net equity inflows into small countries (F32) |
| unexpectedly high local stock returns (G14) | net equity inflows into small countries (F32) |
| past returns (G17) | investor expectations (D84) |
| investor expectations (D84) | net equity inflows into small countries (F32) |
| high equity flows (F21) | decrease the risk premium on foreign stocks (G15) |