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

We show that a gravity model explains international transactions in financi al assets at least as well as goods trade transactions. Our results support the hypothesis that informational asymmetries are responsible for the stro ng negative relationship between asset trade and distance. This result is v ery important for theories of asset trade, portfolio adjustments and home b ias. 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. (C) 2001 Els evier Science B.V. All rights reserved.