Thomas Wu

The determinants of international investment and attention allocation: Using internet search query data

This paper explores the joint determination of home bias and attention allocation. We overcome the typical challenge associated with evaluating attention allocation theories by using a new internet search query dataset to measure how much information investors decide to process. Employing an instrumental variables approach, we find empirical evidence of a two-way causality between home bias and attention. Our estimates suggest that if all countries were to receive the same level of attention as the U.S., then the average home bias by U.S. investors would fall from 85.2% to 57.3%.

The Puzzling Evolution of the Home Bias, Information Processing and Financial Openness

This paper presents a rational expectations model of asset prices with rationally inattentive investors that, unlike previous papers, can explain both the substantial amount of equity wealth invested domestically and the puzzling time series behavior of the home bias - an initial plateau before 1985, then a decrease until 1994 followed by stabilization on another plateau. When there is a financial liberalization, investors exploit past information to predict current asset payoffs. The resulting endogenous local information advantage generates a gradual decrease of the home bias until its steady state. In the long run, the home bias remains large due to the interaction of the optimal attention allocation with the optimal portfolio choice. Using measures for information capacity, informational advantages and ?financial openness as explanatory variables, we are able to explain at least 46.8% of the variation of the home bias for 19 developed countries from 1988 until 2004. Our estimates show that both variables are significant, with home bias decreasing with financial openness and increasing with information capacity, as predicted by our model.

Imperfect financial integration and asymmetric information: competing explanations of the home bias puzzle?

This paper shows that imperfect financial integration and informational asymmetries are not competing theories but rather complementary ideas to a single explanation of the home bias puzzle. We develop a rational expectations model of asset prices with investors that face informational constraints and find that informational advantages arise endogenously as a response to small financial frictions. We also present empirical evidence that (i) international financial frictions are correlated to observed patterns of US investors’ attention and that (ii) the attention US investors allocate to foreign stocks helps explain home bias towards those countries, even after controlling for financial integration levels. Ce memoire montre que l’integration financiere imparfaite et l’information asymetrique ne sont pas des theories concurrentes mais plutot des idees complementaires a l’interieur d’une resolution unifiee de l’enigme du biais en faveur du marche domestique. On developpe un modele d’anticipations rationnelles des prix des actifs face a des investisseurs confrontes a des contraintes informationnelles, et on decouvre que les avantages informationnels emergent de maniere endogene en reponse a de petites frictions financieres. On montre empiriquement que (i) les frictions financieres internationales sont co‐reliees aux patterns d’attention observes des investisseurs des Etats‐Unis, et que (ii) l’attention portee par les investisseurs americains aux marches financiers etrangers aide a expliquer le biais en faveur du marche domestique de ces pays, meme apres avoir pris en compte les niveaux d’integration financiere.

Imperfect Financial Integration and Asymmetric Information: Competing Explanations of the Home Bias Puzzle? (Intégration Financière Imparfaite Et Information Asymétrique: Explications Concurrentes De L’Énigme Du Biais En Faveur Du Marché Domestique?)

This paper shows that imperfect financial integration and informational asymmetries are not competing theories but rather complementary ideas to a single explanation of the home bias puzzle. We develop a rational expectations model of asset prices with investors that face informational constraints and find that informational advantages arise endogenously as a response to small financial frictions. We also present empirical evidence that (i) international financial frictions are correlated to observed patterns of US investors’ attention and that (ii) the attention US investors allocate to foreign stocks helps explain home bias towards those countries, even after controlling for financial integration levels. Ce memoire montre que l’integration financiere imparfaite et l’information asymetrique ne sont pas des theories concurrentes mais plutot des idees complementaires a l’interieur d’une resolution unifiee de l’enigme du biais en faveur du marche domestique. On developpe un modele d’anticipations rationnelles des prix des actifs face a des investisseurs confrontes a des contraintes informationnelles, et on decouvre que les avantages informationnels emergent de maniere endogene en reponse a de petites frictions financieres. On montre empiriquement que (i) les frictions financieres internationales sont co‐reliees aux patterns d’attention observes des investisseurs des Etats‐Unis, et que (ii) l’attention portee par les investisseurs americains aux marches financiers etrangers aide a expliquer le biais en faveur du marche domestique de ces pays, meme apres avoir pris en compte les niveaux d’integration financiere.

Do Both U.S. and Foreign Macro Surprises Matter for the Intraday Exchange Rate? Evidence from Japan

We investigate the effects of both U.S. and Japanese news surprises, measured as the difference between macroeconomic announcements and preceding survey expectations, on the intraday JPY/USD exchange rate. No previous study has considered the intraday JPY/USD exchange rate responses to a broad set of comparable news surprises from both the U.S. and Japan. We show that news surprises from Japan are as influential as those from the U.S. in moving 5-minute JPY/USD exchange rate returns and, therefore, focusing on U.S. news while disregarding foreign news misses half the story. Our results also show that distinguishing between positive and negative news surprises and the state of the Japanese business cycle is important in understanding the link between exchange rates and news.

The Effect of Capital Controls and Prudential FX Measures on Options-Implied Exchange Rate Stability

Has the recent wave of capital controls and prudential foreign exchange (FX) measures been effective in promoting exchange rate stability? We tackle this question by studying a panel of 25 countries/currencies from July 1, 2009, to June 30, 2011. We calculate daily measures of exchange rate volatility, absolute crash risk, and tail risk implied in currency option prices, and we construct indices of capital controls and prudential FX measures taking into account the exact date when policy changes are implemented. Using a difference-in-differences approach, we find evidence that (i) tightening controls on non-residents suppresses daily exchange rate fluctuations at the cost of increasing the frequency of outliers, (ii) easing controls on residents truly improves exchange rate stability over all dimensions, and (iii) tightening prudential FX measures not specific to derivative markets reduces absolute crash risk and tail risk, with no effect on volatility.