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International Capital Flows under Dispersed Information: Theory and Evidence

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  • Tille, Cédric
  • van Wincoop, Eric

Abstract

We develop a new theory of international capital flows based on dispersed information across individual investors. There is extensive evidence of information heterogeneity within and across countries, which has proven critical to understanding asset price behavior. We introduce information dispersion into an open economy dynamic general equilibrium portfolio choice model, and emphasize two implications for capital flows that are specific to the presence of dispersed information. First, gross and net capital flows become partially disconnected from publicly observed fundamentals. Second, capital flows (particularly gross flows) contain information about future fundamentals, even after controlling for current fundamentals. We find that these implications are quantitatively significant and consistent with data for industrialized countries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6989.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:6989

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Keywords: information dispersion; international capital flows;

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References

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Citations

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Cited by:
  1. Jurgen von Hagen & Haiping Zhang, 2011. "International Capital Flows and Aggregate Output," Working Papers 20-2011, Singapore Management University, School of Economics.
  2. Imbs, Jean, 2010. "The First Global Recession in Decades," CEPR Discussion Papers 7973, C.E.P.R. Discussion Papers.
  3. Fernando Broner & Tatiana Didier & Aitor Erce & Sergio L. Schmukler, 2010. "Gross Capital Flows: Dynamics and Crises," Working Papers 476, Barcelona Graduate School of Economics.
  4. Jacob Gyntelberg & Mico Loretan & Tientip Subhanij & Eric Chan, 2009. "Private information, stock markets, and exchange rates," Working Papers 2009-07, Economic Research Department, Bank of Thailand.
  5. Jurgen von Hagen & Haiping Zhang, 2012. "International Capital Flows with Limited Commitment and Incomplete Markets," Working Papers 10-2012, Singapore Management University, School of Economics.
  6. Hnatkovska, Viktoria, 2010. "Home bias and high turnover: Dynamic portfolio choice with incomplete markets," Journal of International Economics, Elsevier, vol. 80(1), pages 113-128, January.
  7. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2011. "U.S. International Equity Investment and Past and Prospective Returns," NBER Working Papers 16677, National Bureau of Economic Research, Inc.
  8. Jürgen von Hagen, 2009. "International Capital Flows and World Output Gains," 2009 Meeting Papers 311, Society for Economic Dynamics.
  9. Jürgen von Hagen & Haiping Zhang, 2014. "International Capital Flows in the Model with Limited Commitment and Incomplete Markets," Open Economies Review, Springer, vol. 25(1), pages 195-224, February.
  10. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2014. "Uncovered Equity Parity and Rebalancing in International Portfolios," NBER Working Papers 19963, National Bureau of Economic Research, Inc.
  11. Stephanie E. Curcuru & Charles P. Thomas & Francis E. Warnock & Jon Wongswan, 2011. "U.S. international equity investment and past prospective returns," International Finance Discussion Papers 1016, Board of Governors of the Federal Reserve System (U.S.).
  12. Janus, Thorsten & Riera-Crichton, Daniel, 2013. "International gross capital flows: New uses of balance of payments data and application to financial crises," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 16-28.

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