Disconnect and Information Content of International Capital Flows: Evidence and Theory

Cédric Tille and Eric van Wincoop
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Eric van Wincoop: University of Virginia, National Bureau of Economic Research and Hong Kong Institute for Monetary Research

No 102009, Working Papers from Hong Kong Institute for Monetary Research

Abstract: The relationship between asset prices and fundamentals is characterized by both disconnect and predictability: asset prices are largely disconnected from current publicly observed fundamentals and at the same time contain information about future fundamentals, even when conditioning on current fundamentals. Previous research has shown that both aspects can be explained by dispersed private information. In this paper we document these same features for international capital flows. We show that this can be explained by introducing information dispersion into recently developed open economy dynamic general equilibrium models encompassing portfolio choice. A calibration exercise shows that these features are quantitatively significant.

Keywords: International Capital Flows; Information Dispersion (search for similar items in EconPapers)
JEL-codes: F32 F36 F41 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2009-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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