Abstract

http://ssrn.com/abstract=1144482
 
 

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The Impact of Sovereign Wealth Funds on Global Financial Markets


Roland Beck


European Central Bank (ECB)

Michael Fidora


European Central Bank (ECB)

July 2, 2008

ECB Occasional Paper No. 91

Abstract:     
This paper analyses the impact of sovereign wealth funds (SWFs) on global financial markets. It presents back-of-the-envelope calculations which simulate the potential impact of a transfer of traditional foreign exchange reserves to SWFs on global capital flows. If SWFs behave as CAPM-type investors and thus allocate foreign assets according to market capitalisation rather than liquidity considerations, official portfolios reduce their "bias" towards the major reserve currencies. As a result, more capital flows "downhill" from rich to less wealthy economies, in line with standard neoclassical predictions. More specifically, it is found that under the assumption of SWFs investing according to market capitalisation weights, the euro area and the United States could be subject to net capital outflows while Japan and the emerging markets would attract net capital inflows. It is also shown that these findings are sensitive to alternative assumptions for the portfolio objectives of SWFs. Finally, the paper discusses whether a change in net capital flows triggered by SWFs could have an impact on stock prices and bond yields. Based on an event study approach, no evidence can be found for a stock price impact of non-commercially motivated stock sales by Norway's Government Pension Fund.

Number of Pages in PDF File: 32

Keywords: Sovereign wealth funds, capital flows, foreign exchange reserves, financial markets

JEL Classification: F30, F40, G15

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Date posted: July 3, 2008 ; Last revised: July 9, 2008

Suggested Citation

Beck, Roland and Fidora, Michael, The Impact of Sovereign Wealth Funds on Global Financial Markets (July 2, 2008). ECB Occasional Paper No. 91. Available at SSRN: http://ssrn.com/abstract=1144482

Contact Information

Roland Beck (Contact Author)
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
Michael Fidora
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
+49 69 1344 5713 (Phone)
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