Information Diffusion in International Markets
Globalization has been a persistent phenomenon of the post-war period. The gross volume of cross-border capital flows has grown at an average of 25 percent a year, and trade in goods and services has also increased, albeit not as dramatically, but...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2003/04/2329625/information-diffusion-international-markets http://hdl.handle.net/10986/18270 |
| Summary: | Globalization has been a persistent
phenomenon of the post-war period. The gross volume of
cross-border capital flows has grown at an average of 25
percent a year, and trade in goods and services has also
increased, albeit not as dramatically, but at least twice as
fast as world GDP over the past 20 years. Yet, consumers and
investors continue to spend and hold a disproportionate
share of their assets in local markets-the so-called
home-bias has been emphasized by many recent empirical
studies. For many researchers, this home bias reflects
information asymmetries and the fact that acquiring
information across international borders is relatively
costly. The main objective of the authors is to identify
channels through which information gets disseminated across
international markets. They consider three potential
channels through which information can affect import and
foreign equity purchase decisions in 14 OECD countries. The
first channel consists of information spillovers from the
commercial to the financial markets and vice-versa.
Financial investors and importers share common information,
which is also frequently conveyed to them by the same
source-banks or financial intermediaries. The second and
third channels emphasize seller and buyer reputations in
international markets. The seller reputation channel
stresses the importance given by, for example, importers in
the United States who are considering buying products from
Italy to the experience that Canadian and Japanese importers
may have accumulated on Italian exporters. The buyer
reputation channel examines to what extent a foreign
investor or trader seeks information on the reliability of
the foreign buyer by assessing his reputation in other
countries. While the last two channels are equally important
in explaining bilateral import flows, buyer reputation
appears to be of greater importance for equity flows in the
sample. The authors argue that these three channels may help
provide some insights about the recent episodes of contagion
across markets and countries that occurred over the past
decade. These information channels can create virtuous or
vicious circles that may, in turn, lead to unexpected
changes in investors' and traders' behaviors
across markets. |
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