Global Volatility and Firm-Level Capital Flows



We study the impact of global equity return volatility on equity portfolio flows using a sample of over 40,000 institutional investors from 40 countries. We find that institutional investors tend to reduce exposure to stocks in their portfolios in times of high global uncertainty; retail local investors, in turn, are net buyers. The effect is economically stronger for foreign institutions than it is for domestic institutions and it is present in a sample of firms in both developed and emerging markets. The quantitative analysis of the results indicates that most estimates based on aggregate firm-level data and ignoring rich investor-firm-level heterogeneities are significantly biased downwards, driven by various unmodeled effects, including heterogenous selection of investors into stocks, time-varying differences in stock sensitivities to global shocks, or time-varying investor inflows and redemptions. To isolate the economic mechanism driving investor flows, we build a general equilibrium portfolio choice model with endogenous learning about asset payoffs. In line with the model’s predictions, we show that foreign investors tend to rebalance their portfolios from small-cap stocks to large-cap stocks when global volatility is high. These results suggest that aggregate global portfolio flows are not driven merely by panics and elevated risk aversion but rather they reflect incentives consistent with the learning model of informed investors. Finally, our results indicate that the information-driven rebalancing predicts an increase in stock return volatility of small-cap stocks and a reduction therein for large-cap stocks.

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Meeting ID: 923 4764 9349