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News, sentiment and capital flows

Kenza Benhima () and Rachel Arulraj-Cordonier

No 2020-04, Working Papers from Swiss National Bank

Abstract: We examine empirically the effect of two types of expectations-related shocks - "news" (increases in expected future productivity) and "sentiment" (surges in optimism unrelated to future productivity) - on gross capital flows. We find that news shocks lead to a decrease in both gross capital inflows and outflows, while sentiment shocks lead to an increase in both gross inflows and outflows. Both these shocks drive a positive correlation between gross inflows and outflows but only sentiments shocks generate procyclical gross flows. These effects are not driven by global shocks or financial shocks. They are consistent with the existence of asymmetric information between domestic and foreign investors about the country's fundamentals.

Keywords: Capital flows; SVAR; asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 E32 F32 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2020
New Economics Papers: this item is included in nep-gen, nep-ifn, nep-mac and nep-opm
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