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The Coming Wave: Where Do Emerging Market Investors Put Their Money?

Published online by Cambridge University Press:  22 March 2019

G. Andrew Karolyi ,
David T. Ng  and
Eswar S. Prasad
G. Andrew Karolyi
Affiliation:
Karolyi, gak56@cornell.edu
David T. Ng*
Affiliation:
Ng, dtn4@cornell.edu
Eswar S. Prasad
Affiliation:
Prasad, eswar.prasad@cornell.edu, Cornell University Johnson College of Business
*
Ng (corresponding author), dtn4@cornell.edu
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Abstract

Using country- and institution-level data, we find that the “coming wave” of emerging- market (EM) investors systematically over- or underweight their equity portfolio holdings in a way that reflects the influences of past capital and trade flows from a foreign country. We interpret this finding as support for van Nieuwerburgh and Veldkamp (2009) information endowment hypothesis. Strong past capital and trade flows create an information advantage that leads EM investors to disproportionately overweight a given foreign market, even relative to developed market investor counterparts. We also pursue predictions of the information endowment hypothesis by constructing novel information-advantage proxies based on relationships among investment firms and the headquarters of their parent companies. These proxies also offer reliable explanatory power for international portfolio allocations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 4 , June 2020 , pp. 1369 - 1414
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

An earlier version of this paper was presented at the 2015 American Finance Association (AFA) meetings. Our AFA discussant, Pab Jotikasthira, provided a number of helpful suggestions. We are grateful to Vidhi Chhaochharia (the referee) and Jennifer Conrad (the editor) for thoughtful comments that have helped improve the analysis and exposition. We also gratefully acknowledge useful comments from Byoung Hwang, Shanjun Li, Lillian Ng, and Tarun Ramadorai as well as seminar and conference participants at Cornell University, the Hong Kong Monetary Authority, the American Finance Association meetings, the 2017 Santiago Finance Workshop, and the 2017 Corvinus University International Liquidity Conference. Ikchan An and Kai Wu provided excellent research assistance. Laura Ardila, Alan Chen, Tingting Ge, Abhinav Rangarajan, Walter Rose, Kaiwen Wang, and Boyang Zhang also contributed to this project. All remaining errors are of course the responsibility of the authors alone.

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