Institutional investors, information and international assets

Chapter one attempts to attribute the forecasting power of institutional crossborder equity flows to either better information on the part of international institutions, or price pressure. Closed-end country fund shares and their associated NAVs are assets that have identical fundamentals, but different trading locations. Cross-border flows have no detectable impact on their difference, the closed-end fund discount. However, cross-border flows positively forecast both NAVs and closed-end fund prices, controlling for institutional and retail closed-end fund inflows. This is consistent with the information hypothesis: cross-border inflows will predict no change in the discount, but will forecast both NAVs and closed-end fund prices; and inconsistent with price pressure: cross-border inflows increase only underlying NAVs. Furthermore, crossborder flows are trend-following based on absolute returns and trend-reversing based on relative returns.;Chapter two explores the interaction between exchange rates, institutional investor currency flows and exchange-rate fundamentals. Flows are highly correlated with contemporaneous and lagged exchange rate changes, and carry information for future excess currency returns. This information is not strongly linked to future fundamentals. Flows assist in understanding transitory elements of excess returns: short-run underreaction and long-run overreaction. However, flows have a zero or negative correlation with permanent components of excess returns. Measured fundamentals explain permanent elements of excess returns. Conclusion: investor flows aid our understanding of deviations of exchange rates from fundamentals, but not in understanding the long-run currency values.;Chapter three analyzes FX markets, where traders have little anonymity and competing intermediaries trade on their own account. First finding: better performing foreign exchange traders trade at prices better than prior FX close. This is consistent with foreign exchange dealers bidding for information from successful traders; consistent with traders acting as secondary liquidity providers in these markets; or by dealers pricing to market in different clienteles of traders. Informed traders offered rebates would have little incentive to space out their orders in time to avoid tipping off the dealer that executes these orders. Consistent with this, successful traders have less persistent currency order flow. The chapter finds evidence to support the claim that persistence arises when traders are likely constrained by liquidity needs.