Abstract
This paper explores a new panel data set on US gross cross-border equity flows to 20 industrialized nations combined with measures of market valuation for the period of 1977-2005. Empirical evidence of imperfect integration across world equity markets indicates that valuation matters. Consistent with relative value trading as a determinant of equity flow patterns, we find that equity flows decrease sharply with host-country market valuations. This paper also finds that equity flows increase sharply with US equity market valuations. The findings of this research suggest that American investors are informed about both domestic markets and foreign markets. Peripheral findings of this research confirm the findings of other researches, but this research is based on a longer sample period. Consistent with existing literature, there is a negative influence of interest rates spreads, and information asymmetries on cross-border trades in equities.
Highlights
Introduction and MotivationThe past two and a half decades have been characterized by a dramatic increase in international capital mobility
In order to estimate the most efficient model, F-tests for fixed effects are performed and if able to reject the null hypothesis, Hausman tests for random effects are estimated, under the null hypothesis both the fixed and random effects model are consistent, but the random effects model is more efficient, rejection of the null hypothesis implies that the fixed effects model is most appropriate
The majority of theories of equity flows assume that the world capital markets are informationally efficient and integrated
Summary
The past two and a half decades have been characterized by a dramatic increase in international capital mobility. In 1975, gross cross-border transactions in bond and equity flows for the US residents were equivalent to only 4 percent of GDP. This share increased to 100 percent in the early 1990s and has continued to increase to 245 percent at the turn of the current century. A growing percentage of these portfolio flows consists of equity (Hau and Rey, 2006). There are few established results on the determinants of equity flows between nations (Portes and Rey, 2005). 50 The International Journal of Banking and Finance, 2008/09 Vol 6.
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