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

HKIMR Working Paper No.10/2009

46 Pages Posted: 18 Mar 2009

See all articles by Cédric Tille

Cédric Tille

Graduate Institute of International and Development Studies (HEI)

Eric van Wincoop

University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 27, 2009

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

JEL Classification: F32, F36, F41

Suggested Citation

Tille, Cedric and van Wincoop, Eric, Disconnect and Information Content of International Capital Flows: Evidence and Theory (February 27, 2009). HKIMR Working Paper No.10/2009. Available at SSRN: https://ssrn.com/abstract=1362320 or http://dx.doi.org/10.2139/ssrn.1362320

Cedric Tille

Graduate Institute of International and Development Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

HOME PAGE: http://sites.google.com/site/cedrictilleheid/home

Eric Van Wincoop (Contact Author)

University of Virginia - Department of Economics ( email )

Rouss Hall 114
P.O. Box 400182
Charlottesville, VA 22904-4182
United States
804-924-3997 (Phone)
804-982-2904 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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