Disconnect and Information Content of International Capital Flows: Evidence and Theory
HKIMR Working Paper No.10/2009
46 Pages Posted: 18 Mar 2009
Date Written: February 27, 2009
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: Suggested Citation