Differences of Opinion and International Equity Markets
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.
For valuable suggestions, we thank Geert Bekaert, Urban Jermann, Leonid Kogan, Stavros Panageas, Anna Pavlova, Raman Uppal, Frank Warnock, Wei Xiong, and three anonymous referees. We are also grateful for comments from participants at presentations given at the University of Pennsylvania Wharton School, HEC Lausanne, the CEPR Fourth Annual Workshop on Global Interdependence at the European University Institute, the 8th Annual Swiss Doctoral Workshop in Finance at Gerzensee, the NBER meeting of International Finance and Macroeconomics, Princeton University, Carnegie Mellon University, the Adam Smith Asset Pricing Conference at the Oxford-Man Institute, the American Finance Association annual meeting, University of Houston, the 10th Annual Darden International Finance Conference, University of Southern California, McGill University, Cornell University, the Society for Economic Dynamics annual meeting, the Federal Reserve Bank at Dallas, University of Calgary, University of Texas at Dallas, Rutgers University, and the Federal Reserve Board. We thank Frank Warnock and Stephanie Curcuru for advice with reconstructing the US net equity purchases data, Ivan Shaliastovich for the forecast variance data, and Xiang Fang for excellent research assistance. Dumas and Osambela gratefully acknowledge the financial support from NCCR FINRISK of the Swiss National Science Foundation. Dumas is also grateful for the hospitality of Collegio Carlo Alberto, and for the support from: the INSEAD research fund, BI Norwegian Business School, and the AXA Chair in Socioeconomic Risks at the University of Torino. Lewis acknowledges funding from the National Science Foundation and the Wharton-SMU Research Center with thanks. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
"Differences of Opinion and International Equity Markets," with K. K. LEWIS and E. OSAMBELA, Review of Financial Studies, 30 (2017), 750-800.