The Information Content of International Portfolio Flows

Kenneth A. Froot, Tarun Ramadorai

NBER Working Paper No. 8472
Issued in September 2001
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

We examine the forecasting power of international portfolio flows for local equity markets and attempt to attribute it to either better information about fundamentals on the part of international investors, or to price pressure. Price pressure is a potential explanation because flows have positive contemporaneous price impacts and are strongly positively autocorrelated. We find that cross-border flows forecast both individual country equity market prices and associated US closed-end country fund prices, even after controlling for closed-end fund purchases. Cross-border flows have no discernable impact on the difference, the closed-end fund discount. This fact is consistent with the information story, which says that cross-border inflows predict no change in the discount, but forecast positive changes in both net asset values and closed-end fund prices. This fact also contradicts the price pressure story, which predicts that cross-border inflows increase local country equity prices, thereby increasing the closed-end fund discount. We also use our approach to test for the presence of trend following in cross-border flows based on relative, as well as absolute returns. Like other studies, we find evidence of trend following based on absolute returns. Interestingly, however, we find also that flows are trend reversing based on relative returns. Flows therefore seem to be stabilizing with respect to notions of relative, but not absolute, value.

download in pdf format
   (453 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8472

Published: Froot, Kenneth A. and T. Ramadorai. “Institutional Portfolio Flows and International Investments." Review of Financial Studies 21, 2 (April 2008): 937-971.

Users who downloaded this paper also downloaded* these:
Froot, G.J. O'Connell, and Seasholes w6687 The Portfolio Flows of International Investors, I
Froot and Tjornhom w9079 Decomposing the Persistence of International Equity Flows
Froot and Ramadorai w9101 Currency Returns, Institutional Investor Flows, and Exchange Rate Fundamentals
Choe, Kho, and Stulz w8073 Do Domestic Investors Have More Valuable Information About Individual Stocks Than Foreign Investors?
Donohue and Froot w9241 The Persistence of Emerging Market Equity Flows
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us