Are U.S. investors blindly chasing returns in foreign countries?

- I examine whether U.S. fund flows are driven by return chasing or by fundamentals.
- U.S. cross-border equity flows positively respond to past foreign stock returns.
- U.S. cross-border bond flows do not follow foreign fixed-income market performance.
- U.S. bond flows increase significantly following a rise in foreign stock markets.
- Foreign stock returns contain important information about future fundamentals.

This paper shows that the positive relation between U.S. cross-border flows and past foreign performance is observed in many stock markets but is ambiguous in bond markets. However, bond flows positively respond to past foreign stock returns. I argue that the importance of past foreign stock returns in driving U.S. investors' equity and bond flows is more likely because those returns reflect foreign fundamentals that are valuable to both U.S. equity and bond investors. I also provide additional evidences, which lead to my conclusion that U.S. investors' international trading is not simply driven by return chasing, but rather, foreign fundamentals.