The US as the Global Equity Safe Haven

Abstract

We systematically document a flight-to-US phenomenon in the global equity market when global volatility soars, using portfolio holdings of globally investing active equity mutual funds with total size of over 2 trillion USD. We find that at the fund-stock level, a fund would on average rebalance to a US stock by 2% of this position relative to a non-US stock contemporaneously under one unit increase of the log VIX index, before reaching its peak of 9.1% after 4 quarters. The rebalance to US is mostly offset by withdraw from the emerging markets. Funds experience better ex-post return by engaging in rebalancing than hypothetically not rebalancing in the short run, but this effect diminishes after 8 quarters. We interpret the empirical findings using a stylized model featuring asymmetric balance sheet capacity between US and non-US liquidity providers that generate a convenience value of US stocks. When volatility rises, mutual funds rebalance to US to lower their potential fire sale cost, thanks to the better balance sheet capacity of US liquidity providers leading to a lower haircut for US stocks.