Economic Policy Uncertainty and Global Portfolio Allocations
By Shashwat Alok, Apoorva Javadekar, Nitin Kumar, R Wermers
Citation
Alok, Shashwat., Javadekar, Apoorva., Kumar, Nitin., Wermers, R. (2022). Economic Policy Uncertainty and Global Portfolio Allocations .
Copyright
2022
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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, 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 do 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 $\rightarrow$ ex-G7 advanced $\rightarrow$ G7. Fourth, we find a novel channel of transmission of uncertainty-related shocks. If EPU spikes in some countries of a fund's portfolio and not in other 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.

Shashwat Alok is an Associate Professor of Finance at the Indian School of Business (ISB). He joined ISB in 2013 after receiving his PhD in Finance from the Olin Business School, Washington University in St. Louis. He is currently the Research Director at the Digital Identity Research Initiative.

His primary research interests are in the areas of corporate finance. In particular, his research focuses on understanding the impact of the law, government policy, and institutions on firms and individual behaviour, with a greater focus on emerging markets. His recent work seeks to examine the role of alternative data and fintech in expanding financial inclusion, and the impact of climate change on firms and capital allocation.

Professor Alok is the recipient of multiple prestigious grants, and his work has been accepted at leading international conferences such as those hosted by the American Finance Association, the Asian Bureau of Finance and Economic Research, the European Finance Association, and the Financial Intermediation Research Society. His research has been published or accepted in top academic journals such as the Review of Financial Studies, Management Science, and the Journal of Financial and Quantitative Analysis. Prof Alok's research has been cited by the Indian Economic Survey (2018-2019) and the Reserve Bank of India's Household Finance Committee Report (2017). His research has also featured in major Indian media outlets, including the Economic Times and the Times of India.

Before joining the PhD programme, he graduated among the top of his class in Computer Science and Engineering from the Manipal University. He was the recipient of the Hubert C. Moog Scholar for academic excellence while pursuing his PhD at the Washington University in St Louis.

Shashwat Alok
Shashwat Alok