Do Sovereign Wealth Funds Stabilize Stock Markets?

Abstract

Sovereign Wealth Funds’ foreign investments play a pivotal role in the stabilization of international stock markets during the recent financial crisis. Using a tail risk measure, we find that SWF investments generally lead to destabilizing effects on the stock markets, however, SWFs with saving objective provides a stabilising impact especially in the crisis period. Also, it is found that SWFs act as a liquidity provider in stock markets.

Keywords: Sovereign wealth fund, Tail risk, Marginal expected shortfall, Liquidity effect

JEL Classification: G14, G15, G18, G30