DP5819 Global Private Information in International Equity Markets

Author(s): Rui Albuquerque , Gregor H Bauer , Martin Schneider

Publication Date: September 2006

Keyword(s): private information , global private information , asymmetric information , portfolio choice , international equity flows and returns , home bias , return chasing

JEL(s): F36 , G12 , G14 , G15

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP5819.asp.asp

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.