Abstract
This paper investigates the dynamic linkages between portfolio flows and various news indices (based on both positive and negative news headlines collected from Bloomberg), whilst also controlling for a comprehensive set of push and pull factors. The monthly panel examined comprises 49 developed and developing countries in addition to the US (the home economy) and covers the period from January 2007 to October 2017; the econometric model includes fixed effects. The empirical results document the important role played by the news variables. More specifically, news pessimism and intensity affect bond flows more than equity flows, and US news appears to play a leading role in these portfolio flow dynamics. By contrast, changes in news pessimism and intensity have a more significant impact on equity flows, and again US news tend to have more sizeable effects. News sentiment is generally found to be an important driver of portfolio flows, whilst only US news disagreement has a significant effect, and only on bond inflows into the US. Most results are robust to the exclusion of the six financial centres from the full sample. As for push and pull factors, most of them (equity return differentials, interest rate spreads, the VIX index, capital controls, exchange rate regimes, CDS spreads, QE episodes, financial development and commodity prices) are significant and with the expected signs.
Highlights
Cross-border portfolio flows have increased sharply in recent years
We find that both news pessimism and news intensity have a significant effect on agents’ portfolio investment decisions, which is more sizeable in the case of US news compared to those concerning its counterpart countries
Though, not much attention has been paid to the possible role of news, despite the substantial body of evidence on the impact of media coverage of economic events on a wide range of financial variables that has been produced in recent years
Summary
Cross-border (equity and bond) portfolio flows have increased sharply in recent years. The present study is related to the rapidly growing literature on the role of news media and social media big data in financial markets (see Bukovina, 2016, for a comprehensive overview) This analyses the effects of sentiment indicators that are extracted from Internet message boards (Antweiler and Frank, 2004), news media articles (see, e.g., Fang and Peress, 2009; Tetlock, 2007; Yuan, 2015, among others), Twitter posts (see, e.g., Sprenger et al, 2014a,b; Al-Nasseri and Menla Ali, 2018), and Internet search data (see, e.g., McLaren and Shanbhogue, 2011; Saxa, 2014, among others).
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