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Political uncertainty and cross-border equity portfolio allocation decisions: International evidence

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  • Kwabi, Frank Obenpong
  • Boateng, Agyenim
  • Wonu, Chizindu
  • Kariuki, Charles
  • Du, Anna

Abstract

Political risk models highlight that political uncertainty matters for corporate investment decisions. However, how political uncertainty matters for investment allocation decisions is relatively under-explored. In this study, we examine the impact of political uncertainty associated with national elections on foreign equity portfolio in 48 countries. Our results indicate that political uncertainty reduces international equity allocations to the host country and such reduction appears more pronounced in the election year. Further analysis shows that the interaction between political uncertainty and institutional quality has a positive and significant effect on international equity portfolio flow, suggesting that the value of institutional quality outweighs the negative effects of political uncertainty. Lastly, we find equity home bias to be negative and significant; however, the interaction between political uncertainty and equity home bias appears insignificant.

Suggested Citation

  • Kwabi, Frank Obenpong & Boateng, Agyenim & Wonu, Chizindu & Kariuki, Charles & Du, Anna, 2023. "Political uncertainty and cross-border equity portfolio allocation decisions: International evidence," International Review of Financial Analysis, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finana:v:87:y:2023:i:c:s1057521923000789
    DOI: 10.1016/j.irfa.2023.102562
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    Keywords

    Political uncertainty; Election uncertainty; Foreign equity portfolio flow; Institutional quality;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • F3 - International Economics - - International Finance
    • H1 - Public Economics - - Structure and Scope of Government
    • H8 - Public Economics - - Miscellaneous Issues

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