International Portfolio Investment Flows




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    • Brennan is from the University of California, Los Angeles, and London Business School. Cao is from the University of California, Berkeley. We are grateful to the Center for International Business Education and Research of the University of California, Los Angeles for financial support. Previous versions of this article were presented at the meetings of AFFI, Geneva 1996, the Northern Finance Association, Quebec City 1996, and the CEPR Summer Workshop, Gerzensee, 1996. The article has been improved as a result of comments from the referee and the editor, René Stulz.


This article develops a model of international equity portfolio investment flows based on differences in informational endowments between foreign and domestic investors. It is shown that when domestic investors possess a cumulative information advantage over foreign investors about their domestic market, investors tend to purchase foreign assets in periods when the return on foreign assets is high and to sell when the return is low. The implications of the model are tested using data on United States (U.S.) equity portfolio flows.