Foreign Sentiment
94 Pages Posted: 23 Dec 2019 Last revised: 11 Jun 2021
Date Written: December 19, 2019
Abstract
We introduce a measure of foreign investor sentiment based on cross-border portfolio rebalancing that extracts the sentiment component in cross-border capital flows. We show that it predicts significant market-level return reversals in the destination markets of investment over one- to twelve-month horizons in- and out-of-sample. Such foreign sentiment effect is driven by an overreaction to negative destination-market news and is stronger for countries that investors perceive as more “foreign.” We provide causal evidence for the news-driven foreign sentiment effect, with 1% foreign sentiment impacting destination-market returns by 5%. Overall, our results suggest worldwide overreactions in response to destination-market bad news.
Keywords: sentiment, foreign sentiment, news, flow shifts, international markets
JEL Classification: G10, G11, G15, G40
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