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'Sleeping with the Enemy' or 'An Ounce of Prevention': Sovereign Wealth Fund Investments and Market Destabilization
April M. Knill Florida State University Bong-Soo Lee Korea Advanced Institute of Science and Technology (KAIST) Nathan Mauck Florida State University - Department of Finance January 14, 2009 Abstract: We investigate whether accusations by the popular press regarding the potential destabilizing force of sovereign wealth fund (SWF) investment have merit. We find uncompensated risk at both the firm- and market-level. Firm volatility decomposition suggests that total risk, systematic risk, and idiosyncratic risk are not compensated at the same level following SWF investment as they were preceding it. Overall, we find a decrease in return without a corresponding decrease in risk as a result of SWF investments. In a limited Granger causality analysis, we find that SWF investment Granger-causes the firm level return/risk relation to deteriorate for some firms. Analysis falls short of demonstrating that the media Granger-causes the poor performance. These findings suggest that SWF investment could indeed be potentially destabilizing.
Keywords: Sovereign wealth fund, Risk, Return JEL Classifications: G15, F34 Working Paper SeriesDate posted: January 16, 2009 ; Last revised: June 04, 2009Suggested CitationContact Information
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