News, Sentiment and Capital Flows

Kenza Benhima and Rachel Arulraj-Cordonier

No 17012, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Capital flows; Svar; Expectations; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 E32 F32 (search for similar items in EconPapers)
Date: 2022-02
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Journal Article: News, sentiment and capital flows (2022)
Working Paper: News, sentiment and capital flows (2020)
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