Journal Article

International Equity Flows and Returns: A Quantitative Equilibrium Approach

Rui Albuquerque, Gregory H. Bauer and Martin Schneider

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 1, pages 1-30
Published in print January 2007 | ISSN: 0034-6527
Published online January 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00412.x
International Equity Flows and Returns: A Quantitative Equilibrium Approach

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This paper considers 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 U.S. investors' international equity trades: (i) trading by U.S. investors occurs in waves of simultaneous buying and selling; (ii) U.S. investors build and unwind foreign equity positions gradually; and (iii) U.S. 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: G12; G15

Journal Article.  14154 words.  Illustrated.

Subjects: International Financial Markets ; Economics

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