The impact of US hurricanes on the portfolio decisions of Italian and Dutch institutional investors

Information frictions are a central mechanism behind market segmentation in cross-border portfolio investment, yet direct evidence on how they shape trading responses to climate shocks remains limited. We use US hurricanes as a particularly suitable setting in which foreign investors face high uncertainty about affected issuers' fundamentals and the geographic distribution of physical damage. Focusing on Italy and the Netherlands, we exploit a novel dataset that links confidential security-level holdings to issuers' fundamentals and hurricane exposure to study how institutional investors adjust US equity and corporate bond portfolios following hurricanes. We find that institutional investors in both countries reduce their holdings of hurricane-exposed US equities, but Dutch investors react more strongly and with broader reallocations, including shifts toward unaffected bonds. Disaggregated results show that Dutch pension funds drive these effects: they cut hurricane-exposed equities and increase holdings of unaffected corporate bonds, deviating from standard within-asset-class rebalancing and instead suggesting a reassessment of asset fundamentals. In contrast, Dutch investment funds reduce equity positions overall but sell fewer exposed equities than non-exposed ones. Overall, the evidence highlights a pronounced heterogeneity in institutional responses and challenges the view that long-horizon investors necessarily stabilize markets after climate-related shocks. It also underscores how geographic and informational distance shape institutional trading under physical climate risk.