Information and capital flows: The determinants of transactions in financial assets

Abstract We show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions. Our results support the hypothesis that informational asymmetries are responsible for the strong negative relationship between asset trade and distance. This result is very important for theories of asset trade, portfolio adjustments and home bias. We strengthen it by investigating the roles of explicit informational variables, as well as distance, in explaining separately cross-border trade in corporate equities, corporate bonds, and government bonds.