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

Author

Listed:
  • Cedric Tille

    (Graduate Institute, Geneva, Centre for Economic Policy Research)

  • Eric van Wincoop

    (University of Virginia, National Bureau of Economic Research and Hong Kong Institute for Monetary Research)

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.

Suggested Citation

  • Cedric Tille & Eric van Wincoop, 2009. "Disconnect and Information Content of International Capital Flows: Evidence and Theory," Working Papers 102009, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:102009
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    References listed on IDEAS

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    2. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," Journal of Economic Literature, American Economic Association, vol. 51(1), pages 63-115, March.
    3. repec:hal:wpspec:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    4. repec:spo:wpmain:info:hdl:2441/1shj1p7td8e0r5c9fcsnk8a91 is not listed on IDEAS
    5. Habib, Maurizio Michael & Floreani, Vincent Arthur, 2015. "Financial exposure to the euro area before and after the crisis: home bias and institutions at home," Working Paper Series 1799, European Central Bank.
    6. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    7. Nicolas Coeurdacier & Hélène Rey, 2010. "Home bias in open economy financial macroeconomics," SciencePo Working papers hal-01069440, HAL.
    8. repec:ecb:ecbwps:20141799 is not listed on IDEAS
    9. Nicolas Coeurdacier & Hélène Rey, 2013. "Home Bias in Open Economy Financial Macroeconomics," SciencePo Working papers hal-03473901, HAL.
    10. repec:spo:wpmain:info:hdl:2441/c8dmi8nm4pdjkuc9g81p7j6b6 is not listed on IDEAS
    11. repec:hal:spmain:info:hdl:2441/1shj1p7td8e0r5c9fcsnk8a91 is not listed on IDEAS

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    More about this item

    Keywords

    International Capital Flows; Information Dispersion;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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