This paper by Richard Portes and Hélène Rey examines the determinants of cross-border equity flows using a new panel dataset covering 14 countries from 1989 to 1996. The authors integrate insights from finance and international macroeconomics to develop a model that includes market size, trading costs, information asymmetries, and transaction efficiency. The resulting "augmented gravity" equation explains 70% of the variance in equity flows, with key variables such as market capitalization, distance, and information transmission playing significant roles. The study finds that distance primarily proxies for information asymmetries, and that information transmission variables, such as telephone call traffic and multinational bank branches, are highly significant. The authors conclude that theoretical models of asset trade should incorporate these factors, shifting away from models based on factor endowments and towards those that include differentiated assets, transaction costs, and information asymmetries. The findings also suggest that the importance of information asymmetries in trade has been underestimated in empirical studies.This paper by Richard Portes and Hélène Rey examines the determinants of cross-border equity flows using a new panel dataset covering 14 countries from 1989 to 1996. The authors integrate insights from finance and international macroeconomics to develop a model that includes market size, trading costs, information asymmetries, and transaction efficiency. The resulting "augmented gravity" equation explains 70% of the variance in equity flows, with key variables such as market capitalization, distance, and information transmission playing significant roles. The study finds that distance primarily proxies for information asymmetries, and that information transmission variables, such as telephone call traffic and multinational bank branches, are highly significant. The authors conclude that theoretical models of asset trade should incorporate these factors, shifting away from models based on factor endowments and towards those that include differentiated assets, transaction costs, and information asymmetries. The findings also suggest that the importance of information asymmetries in trade has been underestimated in empirical studies.