Is Sovereign Wealth Fund Investment Destabilizing?
42 Pages Posted: 16 Jan 2009 Last revised: 1 Jun 2010
Date Written: June 1, 2010
We investigate whether accusations by the popular press regarding the potential destabilizing force of sovereign wealth fund (SWF) investment have merit. SWF investments are associated with a reduction in the compensation of risk over the five-year term examined. Firm volatility decomposition suggests that it is mainly idiosyncratic risk that drives these impacts. Granger causality results suggest that SWFs are poorly informed in their investments (compared to the market) or they have nonfinancial motivations. There is no evidence that the media coverage precedes the poor performance. These findings suggest that SWF investment could be potentially destabilizing.
Keywords: Sovereign wealth fund, Risk, Return
JEL Classification: G15, F34
Suggested Citation: Suggested Citation