News, sentiment and capital flows

We examine empirically the effect of two types shocks related to expectations – “news” (increases in expected future productivity) and “sentiment” (surges optimism unrelated on gross capital flows. These together explain more than 80% variation flows at all horizons, with largest part being due sentiment shocks. Both these drive a positive correlation between inflows outflows but only sentiments generate procyclical show that are not accounted for by financial, monetary or uncertainty shocks, nor they purely global. The empirical news constitute challenge most theories flows, consistent existence asymmetric information domestic foreign investors about country's fundamentals.