Tuesday, April 12, 2016

Differences of Opinion and International Equity Markets

DUMAS Bernard, LEWIS Karen K., OSAMBELA Emilio
Read the working paper
INSEAD Working Paper 2016/24/FIN revised version of 2011/77/FIN

We develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information content in public signals.
We determine how informational advantages by domestic investors in the interpretation of home public signals impact equity markets. We evaluate the ability of our model to generate four international finance anomalies: (i) the co-movement of returns and capital flows; (ii) home-equity preference; (iii) the dependence of firm returns on home and foreign factors; and (iv)abnormal returns around foreign firm cross-listing in the home market. Their relationships with empirical differences-of-opinion proxies are consistent with the model.