Information Diffusion in International Markets

Globalization has been a persistent
\n phenomenon of the post-war period. The gross volume of
\n cross-border capital flows has grown at an average of 25
\n percent a year, and trade in goods and services has also
\n increased, albeit not as dramatically, but at least twice as
\n fast as world GDP over the past 20 years. Yet, consumers and
\n investors continue to spend and hold a disproportionate
\n share of their assets in local markets-the so-called
\n home-bias has been emphasized by many recent empirical
\n studies. For many researchers, this home bias reflects
\n information asymmetries and the fact that acquiring
\n information across international borders is relatively
\n costly. The main objective of the authors is to identify
\n channels through which information gets disseminated across
\n international markets. They consider three potential
\n channels through which information can affect import and
\n foreign equity purchase decisions in 14 OECD countries. The
\n first channel consists of information spillovers from the
\n commercial to the financial markets and vice-versa.
\n Financial investors and importers share common information,
\n which is also frequently conveyed to them by the same
\n source-banks or financial intermediaries. The second and
\n third channels emphasize seller and buyer reputations in
\n international markets. The seller reputation channel
\n stresses the importance given by, for example, importers in
\n the United States who are considering buying products from
\n Italy to the experience that Canadian and Japanese importers
\n may have accumulated on Italian exporters. The buyer
\n reputation channel examines to what extent a foreign
\n investor or trader seeks information on the reliability of
\n the foreign buyer by assessing his reputation in other
\n countries. While the last two channels are equally important
\n in explaining bilateral import flows, buyer reputation
\n appears to be of greater importance for equity flows in the
\n sample. The authors argue that these three channels may help
\n provide some insights about the recent episodes of contagion
\n across markets and countries that occurred over the past
\n decade. These information channels can create virtuous or
\n vicious circles that may, in turn, lead to unexpected
\n changes in investors' and traders' behaviors
\n across markets.

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