International capital flows when investors have local information
By: Joshua D. Coval
Contributors: Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 04-026; Working paper (Harvard Business School. Division of Research) -- 04-026
Publisher: Division of Research, Harvard Business School
Published: 2003
Place of publication: Boston]
Language: eng
Number of pages: 32
Description: While international capital flows have increased dramatically over the past two decades, from a risk-sharing perspective, world capital markets do not appear highly integrated. Investors continue to hold disproportionately large claims to domestic output, fund domestic investment mostly out of domestic savings, and consume at very different rates than agents residing abroad. In this paper, we investigate investment behavior in a model in which agents have superior information regarding domestic returns than those overseas. We show that such a setting, when calibrated to U.S. macroeconomic data, offers a unified explanation for the three risk-sharing puzzles in an environment of active capital flows. Investors' cross-border trading serves to amplify, rather than dampen, cross-border consumption differences and domestic savings-investment correlations.
Notes: "March 2000"--Added t.p.

Includes bibliographical references.