The impact of sovereign wealth funds on global financial markets

Roland Beck () and Michael Fidora ()

No 91, Occasional Paper Series from European Central Bank

Abstract: This paper analyses the impact of sovereign wealth funds (SWFs) on global financial markets. It presents back-of-the-envelope calculations which simulate the potential impact of a transfer of traditional foreign exchange reserves to SWFs on global capital flows. If SWFs behave as CAPM-type investors and thus allocate foreign assets according to market capitalisation rather than liquidity considerations, official portfolios reduce their “bias” towards the major reserve currencies. As a result, more capital flows “downhill” from rich to less wealthy economies, in line with standard neoclassical predictions. More specifically, it is found that under the assumption of SWFs investing according to market capitalisation weights, the euro area and the United States could be subject to net capital outflows while Japan and the emerging markets would attract net capital inflows. It is also shown that these findings are sensitive to alternative assumptions for the portfolio objectives of SWFs. Finally, the paper discusses whether a change in net capital flows triggered by SWFs could have an impact on stock prices and bond yields. Based on an event study approach, no evidence can be found for a stock price impact of non-commercially motivated stock sales by Norway’s Government Pension Fund. JEL Classification: F30, F40, G15.

Keywords: Sovereign wealth funds; capital flows; foreign exchange reserves; financial markets. (search for similar items in EconPapers)
Date: 2008-07
References: Add references at CitEc
Citations View citations in EconPapers (23) Track citations by RSS feed

Downloads: (external link)
http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp91.pdf (application/pdf)

Related works:
Journal Article: The impact of sovereign wealth funds on global financial markets (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ecb:ecbops:20080091

Ordering information: This working paper can be ordered from
Press and Information Division, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany

Access Statistics for this paper

More papers in Occasional Paper Series from European Central Bank
Address: Postfach 16 03 19, Frankfurt am Main, Germany
Contact information at EDIRC.
Series data maintained by Official Publications ().