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News, Sentiment and Capital Flows

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  • Benhima, Kenza
  • Cordonier, Rachel

Abstract

We examine empirically the effect of two types of shocks related to expectations - "news" (increases in expected future productivity) and "sentiment" (surges in optimism unrelated to future productivity) - on gross capital flows. These two shocks together explain more than 80% of the variation in gross capital flows at all horizons, with the largest part being due to sentiment shocks. Both shocks drive a positive correlation between gross inflows and outflows but only sentiments shocks generate procyclical gross flows. We show that sentiment shocks are not accounted for by financial, monetary or uncertainty shocks, nor are they purely global. The empirical effect of news and sentiment shocks constitute a challenge to most theories of capital flows, but are consistent with the existence of asymmetric information between domestic and foreign investors about the country's fundamentals.

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  • Benhima, Kenza & Cordonier, Rachel, 2022. "News, Sentiment and Capital Flows," CEPR Discussion Papers 17012, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17012
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    Cited by:

    1. Choi, Sangyup & Ciminelli, Gabriele & Furceri, Davide, 2023. "Is domestic uncertainty a local pull factor driving foreign capital inflows? New cross-country evidence," Journal of International Money and Finance, Elsevier, vol. 130(C).
    2. Benhima, Kenza & Bolliger, Elio, 2022. "Do Local Forecasters Have Better Information?," MPRA Paper 117072, University Library of Munich, Germany, revised Sep 2023.
    3. Yang, Yang & Tang, Yanling & Zhang, Ren & Wu, Li, 2023. "Investigating the impact of technology and noise shocks on capital flows," Finance Research Letters, Elsevier, vol. 56(C).
    4. Paul Luk & Tianxiao Zheng, 2020. "Foreign Direct Investment and Debt Financing in Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 863-905, June.
    5. Armelius, Hanna & Bertsch, Christoph & Hull, Isaiah & Zhang, Xin, 2020. "Spread the Word: International spillovers from central bank communication," Journal of International Money and Finance, Elsevier, vol. 103(C).

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    More about this item

    Keywords

    Capital flows; Svar; Expectations; Asymmetric information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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