Gross capital flows and asymmetric information

Dvořák, Tomáš

doi:10.1016/j.jimonfin.2003.08.007

Cited by 30 publications

(8 citation statements)

References 27 publications

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“…In contrast, Dvořák's (2003) model predicts a negative contemporaneous relationship between local returns and net foreign flows based on local investors' marginal information advantage. Rey's (2004, 2006) model predicts a negative relationship for a different reason: differential equity-market performance induces portfolio rebalancing to bring exchange rate exposure back to previous levels (i.e., selling following host market positive return shocks).…”

Section: Accepted Manuscriptmentioning

confidence: 82%

The interaction between foreigners' trading and stock market returns in emerging Europe

Ülkü

2015

Journal of Empirical Finance

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Section: Accepted Manuscriptmentioning

confidence: 82%

The interaction between foreigners' trading and stock market returns in emerging Europe

Ülkü

2015

Journal of Empirical Finance

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“…In the absence of higher frequency data, it is difficult to distinguish between these three possibilities. In contrast, Dvořák's () model predicts a negative contemporaneous relationship between host market returns and net foreign flows due to marginal information advantage of local investors. Hau and Rey's () model predicts a negative relationship due to portfolio rebalancing, induced by differential equity market performance, to bring exchange rate exposure back to previous levels.…”

Section: Main Questions In the Foreign Investors Literaturementioning

confidence: 88%

“…Incomplete data types include one source country, as in the case of US Treasury International Capital (TIC) data set, one custodian, or one type of investor. 2 In particular, major tests of theories of foreign investor behavior were performed using TIC data that cover only US investor flows (Bohn and Tesar 1996;Brennan and Cao 1997;Bekaert et al 2002;Dvořák 2003;Hau and Rey 2006;Albuquerque et al 2007Albuquerque et al , 2009. In these studies, US investor flows toward each host market were used to represent 'foreign' investors.…”

Section: Introductionmentioning

confidence: 99%

How Reliable Are the Findings of ‘Foreign’ Investor Studies That Use TIC Data? A Look from the Host Market

Ülkü

Petrov

2015

Int Rev Finance

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Empirical literature on foreign investors' trading in stock markets heavily relies on US Treasury International Capital (TIC) data. Biases in TIC data and the fact that it represents only one source country raise questions on how reliable the conclusions based on TIC data are. Employing novel data of complete foreign flows compiled at destination, we answer these questions. Although the correlations between net flows derived from TIC and destination-compiled data are low, and visible differences exist in some individual country results, TIC findings are not far off in central tendency. Notably, however, net foreign flows' persistence, positive response to world returns and positive contemporaneous correlation with local returns are more significant than TIC data suggest. Measurement noise in TIC data appears to result in underestimation of these key features.

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“…For example, retrenchment of capital may not occur if domestic agents have more negative private information about their own country than foreign agents, which is a possibility during 11 Asymmetric information in international finance models can also rationalize trading patterns such as return chasing, volatility of capital flows, and positive correlations between inflows and outflows (e.g. Albuquerque et al, 2009, Dvořák, 2003, Tille and van Wincoop, 2014 downturns. That is, the theory proposed in this paper is able to jointly rationalize home bias and other documented patterns of capital flows, such as retrenchment and fickleness during global recessions, while most equity home bias models fail to rationalize these facts jointly.…”

Section: Gehrigmentioning

confidence: 99%

Investor experiences and international capital flows

Malmendier

Pouzo²,

Vanasco³

2020

Journal of International Economics

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We propose a novel explanation for classic international macro puzzles regarding capital flows and portfolio investment, which builds on modern macro-finance models of experience-based belief formation. Individual experiences of past macroeconomic outcomes have been shown to exert a long-lasting influence on beliefs about future realizations, and to explain domestic stock-market investment. We argue that experience effects can explain the tendency of investors to hold an over proportional fraction of their equity wealth in domestic stocks (home bias), to invest in domestic equity markets in periods of domestic crises (retrenchment), and to withdraw capital from foreign equity markets in periods of foreign crises (fickleness).Experience-based learning generates additional implications regarding the strength of these puzzles in times of higher or lower economic activity and depending on the demographic composition of market participants. We test and confirm these predictions in the data. * We thank Vladimir Asriyan, Fernando Broner, Nicolas Courdacier, Jaume Ventura, and seminar participants at CREi-UPF and the NBER ISOM conference 2019 in London for their comments and suggestions, and Clint Hamilton for excellent research assistance.future stock market returns, and this long-term influence is more pronounced among younger generations (Malmendier and Nagel, 2011). 2 Models of experience effects naturally generate both the overweighting of recent experiences and the long-lasting effects of lifetime experiences. Experience-based learners assign extra weight to realizations of macro-financial variables that they have personally experienced when they form beliefs about future outcomes of the same variables. A given crisis experience exerts stronger influence on younger cohorts, for whom the crisis experience constitutes a larger portion of their lifetime histories so far. 3 In addition, models of experience-based learning also rationalize classical asset-pricing puzzles such as return predictability (Campbell and Shiller, 1988, Fama and French, 1988) and excess volatility (LeRoy, 2005, LeRoy and Porter, 1981, Shiller, 1981, and micro-level stylized facts such as investors chasing past performances. 4These insights have direct implications for international macro models, as investors in different countries have different "experiences." They differ in their exposures to domestic versus foreign outcomes, and different countries also have different demographics. For example, applied to the Asian financial crisis, experience-based learning would predict that the crisis has exerted a significant influence on the risk attitudes and beliefs of East Asians, and its influence was different for, say, Europeans -even controlling for income, wealth, and other standard factors. Moreover, comparing regions across and within East Asia, the influence is predicted to differ depending on where a higher fraction of young market participants were exposed in each country. Nevertheless, most of the international finance models to date ar...

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Gross capital flows and asymmetric information

Cited by 30 publications

References 27 publications

The interaction between foreigners' trading and stock market returns in emerging Europe

The interaction between foreigners' trading and stock market returns in emerging Europe

How Reliable Are the Findings of ‘Foreign’ Investor Studies That Use TIC Data? A Look from the Host Market

Investor experiences and international capital flows

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