Economic Policy Uncertainty and Global Portfolio Allocations

46 Pages Posted: 25 Aug 2022

See all articles by Shashwat Alok

Shashwat Alok

Indian School of Business (ISB), Hyderabad

Apoorva Javadekar

Indian School of Business

Nitin Kumar

Indian School of Business (ISB), Hyderabad

Russ Wermers

University of Maryland - Robert H. Smith School of Business; European Corporate Governance Institute (ECGI)

Date Written: August 15, 2022

Abstract

We examine how global institutional funds respond to news-based economic policy uncertainty (EPU) in the investment destination and home country. We document a number of novel findings. First, on an average there exists a negative flow-EPU relationship for global funds. Second, we document a novel "home effect." An average fund does not withdraw capital from the home country when EPU spikes in the home country, but it is a special feature of G7 economies. Funds domiciled in ex-G7 and developing countries reduce capital allocation when home EPU increases. Third, there is a pecking order of negative flow-EPU relationship when focusing on EPU of destination countries. The magnitude of the relationship follows the following order: emerging > ex-G7 advanced > G7. We also show a novel channel of transmission of uncertainty-related shocks. If EPU spikes in some countries of a fund's portfolio and not in other portfolio (non-impacted) countries, funds withdraw capital even from the non-impacted countries. Overall, our study shows that global funds may propagate financial shocks in response to economic uncertainty.

Keywords: Institutional Funds, Economic Policy Uncertainty, Fund Flows

JEL Classification: G11, G20, G23

Suggested Citation

Alok, Shashwat and Javadekar, Apoorva and Kumar, Nitin and Wermers, Russell R., Economic Policy Uncertainty and Global Portfolio Allocations (August 15, 2022). Available at SSRN: https://ssrn.com/abstract=4193637 or http://dx.doi.org/10.2139/ssrn.4193637

Shashwat Alok

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India
914023187188 (Phone)

Apoorva Javadekar

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Nitin Kumar

Indian School of Business (ISB), Hyderabad ( email )

India

Russell R. Wermers (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://terpconnect.umd.edu/~wermers/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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