The dynamics of international equity market expectations

Michael J. Brennan, H. Henry Cao, Norman Strong, Xinzhong Xu

Research output: Contribution to journalArticlepeer-review


This paper develops a noisy rational expectations model of the way in which international investors adjust their expectations of asset payoffs in a given country in response not only to public information signals but also to private information signals whose precision differs across investors. The model predicts that the perceptions of investors in one country about the future market returns in another country are related differently to realized past returns depending on their informational disadvantage relative to other investors: the greater is that informational disadvantage, the greater is the change in perception associated with returns. The predictions are confirmed by monthly survey data of institutional money managers investing in developed markets from 1995 to 2000. © 2005 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)257-288
Number of pages31
JournalJournal of Financial Economics
Issue number2
Publication statusPublished - Aug 2005


  • Asymmetric information
  • Foreign investor informational disadvantage
  • Home bias
  • International portfolio flows
  • Rational expectations


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