Foreign Sentiment

94 Pages Posted: 23 Dec 2019 Last revised: 11 Jun 2021

See all articles by Azi Ben-Rephael

Azi Ben-Rephael

Rutgers Business School - Rutgers University

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Massimo Massa

INSEAD - Finance

Changyun Zhou

Baruch College / City University of New York

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

Suggested Citation

Ben-Rephael, Azi and Dong, Xi and Massa, Massimo and Zhou, Changyun, Foreign Sentiment (December 19, 2019). Baruch College Zicklin School of Business Research Paper No. 2020-01-01, Available at SSRN: https://ssrn.com/abstract=3506910 or http://dx.doi.org/10.2139/ssrn.3506910

Azi Ben-Rephael

Rutgers Business School - Rutgers University ( email )

HOME PAGE: http://https://sites.google.com/site/abenreph

Xi Dong

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

One Bernard Baruch Way, Box B10-225
New York City, NY 10010
United States

HOME PAGE: http://faculty.baruch.cuny.edu/xdong1/

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Changyun Zhou (Contact Author)

Baruch College / City University of New York ( email )

One Bernard Baruch Way, Box B10-225
New York City, NY 10010
United States
6463123457 (Phone)

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