Information and capital flows: The determinants of transactions in financial assets

TLDR: In this paper, the authors show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions, and support the hypothesis that informational asymmetries are responsible for the strong negative relationship between asset trade and distance.

About: This article is published in European Economic Review.The article was published on 2001-05-01 and is currently open access. It has received 468 citations till now. The article focuses on the topics: Asset (economics) & Gravity model of trade.

Figures

Table 2 Foreign residents' transactions in US corporate equities, 1988}98

Table 3 Foreign residents' transactions in US corporate bonds, 1988}98

Table 1 Bilateral equity transaction #ows 1989}96

Table 4 Foreign residents' transactions in US treasury bonds, 1988}98

Table 5 US residents' transactions in foreign corporate equities, 1988}98

Table 6 US residents' transactions in foreign bonds, 1988}98

Frequently asked questions

Q1. What are the contributions in "Information and capital #ows: the determinants of transactions in "nancial assets" ?

The authors show that a gravity model explains international transactions in `` nancial assets at least as well as goods trade transactions. The authors strengthen it by investigating the roles of explicit informational variables, as well as distance, in explaining separately cross-border trade in corporate equities, corporate bonds, and government bonds. 

Q2. What have the authors stated for future works in "Information and capital #ows: the determinants of transactions in "nancial assets" ?

In future work, the authors plan to extend this analysis to cross-border bank loans and to foreign direct investment. The authors will also investigate the determinants of asset holdings in order to compare them with their results on # ows, so that a coherent theory of asset trade can be constructed which should take full account of the viscosities of the so-called global international capital market. 

Q3. How is the overall goodness of the regressions?

The overall goodness of "t of these regressions is remarkably strong } with four explanatory variables, the authors are capturing 70% of the variance of transactions #ows in the pooled regressions, and the &between' R s are 0.84 and 0.86. 

Q4. What is the measure of the foreign country's "nancial wealth?

Their measure of the foreign country's "nancial wealth is the sum of the market capitalization of its equity, bond markets and bank claims. 

Q5. What is the important information for investors?

Another relevant type of information for investors may be of a more strictly "nancial nature: how liquid is the market, who are the other investors participating, or what are the covariances of the assets. 

Q6. What is the reason why the authors cannot use the dummy variables for each year?

One consequence of using the dummy variables for each year is that the authors cannot use US "nancial wealth as a second scale variable, because the year dummies will absorb its e!ect. 

Q7. What is the elasticity of the volume of transactions by foreigners in US stock markets with respect?

The elasticity of the volume of transactions by foreigners in US stock markets with respect to the total US stock market capitalization is very close to unity. 

Q8. What is the only case where distance appears to be not signi"cant?

This is the only case so far in their work where distance appears not to be signi"cant (except in column (1)) } indeed, it takes a positive coe$cient in the regressions with telephone tra$c, which however appears fairly strongly.