Institutional Investor Flows Around the World

In this book I examine the driving factors of the international investors' fund flows using recent high-frequency international equity and fixed income flows to 51 countries. I find that equity flows respond positively to past stock returns. More importantly, so do fixed income flows. This relationship is new to the literature and is robust to various model specifications. It indicates that the equity flow-past equity return relationship is not simply driven by return chasing because fixed income investors are unlikely to be chasing returns in the foreign equity market. Instead, this evidence suggests that past foreign stock returns contain information about future fundamentals that are also relevant to fixed income investors. Moreover, international investors do not reallocate flows from fixed income to equity securities in response to foreign stock price increase, as would be expected for positive feedback trading. All these empirical findings are robust for U.S. domiciled and non-U.S. domiciled investors. Collectively these results suggest that cross-border equity flows are driven by information about foreign fundamentals rather than by positive feedback trading.