The Determinants of Cross-Border Equity Flows: The Geography of Information

Richard Portes and Hélène Rey.
Authors registered in the RePEc Author Service: Helene Rey and Richard Portes

No C00-111, Center for International and Development Economics Research (CIDER) Working Papers from University of California at Berkeley

Abstract: We apply a new approach to a new panel data set on bilateral gross cross-border equity flows between 14 countries, 1989-96. The model integrates elements of the finance literature on portfolio composition and the international macroeconomics and asset trade literature. Gross asset flows depend on market size in both source and destination country as well as trading costs, in which both information and the transaction technology play a role. Distance proxies some information costs, and other variables explicitly represent information transmission, an information asymmetry between domestic and foreign investors, and the efficiency of transactions. The remarkably good results have strong implications for theories of asset trade. We find that the geography of information is the main determinant of the pattern of international transactions, while there is little support in our data for diversification and 'return-chasing' motives for transactions.

Date: 2000-07-01
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