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Are Sovereign Wealth Funds contrarian investors?

Author

Listed:
  • Alessio Ciarlone

    () (Banca d'Italia)

  • Valeria Miceli

    () (Universit� Cattolica del Sacro Cuore)

Abstract

This paper investigates the determinants of the investment activity of Sovereign Wealth Funds (SWFs) at a macro level, with special emphasis on the possible reaction to a financial crisis in a potential target economy. The analysis relies upon a specially built proprietary database, which encompasses 1,903 acquisition deals spanning the period 1995-2010 and involving 29 out of the 69 existing SWFs. According to a three-step modelling approach, we find that this class of investors prefers to invest in countries with a higher degree of economic development, larger and more liquid financial markets, institutions that offer better protection of legal rights, and a more stable macroeconomic environment. Most importantly, and in stark contrast with the existing empirical literature on other major institutional investors, SWFs seem to engage in �contrarian� investment behaviour, i.e. increasing their acquisitions in countries where crises hit. The results are shown to be valid if we consider both the likelihood of a country being the target of SWFs� investments and the amount SWFs choose to invest in each country. Capital flows stemming from SWFs� acquisition activity worldwide may therefore eventually have a stabilizing effect on local markets during periods of financial turmoil, protecting the targeted countries from foreign shocks instead of propagating them globally.

Suggested Citation

  • Alessio Ciarlone & Valeria Miceli, 2014. "Are Sovereign Wealth Funds contrarian investors?," Temi di discussione (Economic working papers) 972, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_972_14
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2014/2014-0972/en_tema_972.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Dariusz Urban, 2016. "The Investment Attractiveness of Companies Listed on the Warsaw Stock Exchange to Sovereign Wealth Funds," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 66(2), pages 333-350, June.

    More about this item

    Keywords

    Sovereign Wealth Funds; cross-border investment; acquisition determinants; contrarian; financial crises;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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