The impact of sovereign wealth funds on global financial markets

Intereconomics

Volumn 43, Issue 6, 2008, Pages 349-358

  Beck, Roland ^a   Fidora, Michael ^a  

^a EUROPEAN CENTRAL BANK   (Germany)

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EID: 59549107792     PISSN: 00205346     EISSN: 1613964X     Source Type: Journal    
DOI: 10.1007/s10272-008-0268-5     Document Type: Article

References (53)

1. For an overview of foreign exchange reserve accumulation, see European Central Bank: The accumulation of foreign reserves, ECB Occasional Paper, No. 43, 2006.
2. The IMF Committee on Balance of Payments Statistics is currently working on a precise and operational defi nition in order to enhance the reporting in this area.
3. The lack of explicit liabilities is not a necessary condition for financial institutions to have a long-term investment horizon. For example, traditional banks often transform short-term liabilities into long-term assets. Nevertheless, from a balance sheet perspective, a low degree of short-term liabilities favours the pursuit of long-term strategies.
4. Pension funds often match their fixed liabilities that imply a stream of future payments with investments into fixed coupon-bearing bonds.
5. For a discussion on the relation between oil stabilisation funds and fiscal policy, see, for example, S. Barnett, J. M. Davis, R. Ossowski and J. Daniel: Stabilization and savings funds for nonrenewable resources: Experience and fiscal policy implications, IMF Occasional Paper, No 205, 2001
6. S. Barnett, R. Ossowski: Operational aspects of fi scal policy in oil-producing countries, IMF Working Paper, No 02/177, 2002.
7. This is the case for many oil producers who, in order to avoid sharp adjustments of fiscal policy once oil reserves are depleted, accumulate financial assets during the period in which they produce oil. Thus, oil wealth is gradually transformed into fi nancial wealth, leaving the country's overall wealth unchanged and preserving it for future generations.
8. In Japan - the second largest holder of official foreign exchange reserves of more than US $900 billion - the effectiveness of traditional reserve management has also recently been discussed. Furthermore, South Korea has announced plans to double the size of the sovereign wealth fund that manages part of its reserves by 2010 and similar steps are being considered in a number of other countries in the region such as Taiwan, Vietnam and India.
9. We avoid double-counting by excluding funds which also qualify as official reserves. For example, Russia's current oil stabilisation fund is - in the form of government deposits - the balance sheet liability counterpart to the central banks' foreign assets which are counted as official foreign exchange reserves.
10. CDS = Credit Default Swap.
11. A similar approachWis taken by S. Jen: Sovereign wealth funds: what they are and what's happening, in: World Economics, Vol. 8, No. 4, 2007.
12. Excess reserves are defined as foreign exchange reserves in excess of both (i) the difference between actual foreign exchange reserves and the value of three months of imports; and (ii) the difference between actual foreign exchange reserves and total short-term external debt.
13. In fact, taking into account that the new investments of SWFs would span a long time horizon, current market capitalisation weights are unlikely still to be accurate. In addition, SWFs may have an impact on market capitalisation weight through their own investment decisions, thus generating "second-round effects" which SWFs would ideally also factor into their optimal portfolio considerations.
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18. CAPM = Capital Asset Pricing Model.
19. In the case of Temasek, emerging economies are even clearly overweight, accounting for 40% of the total portfolio against a portfolio weight of only 20% of OECD economies excluding Korea.
20. See R. Beck, E. Rahbari: Optimal reserve composition in the presence of sudden stops: The euro and the dollar as safe haven currencies, ECB Working Paper No. 916, 2008
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23. Cf. M. Chinn, J. Frankel: Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?, in: Richard Clarida (ed.): G7 Current Account Imbalances: Sustainability and Adjustment, Chicago 2006, The University of Chicago Press, on the determinants of reserve currencies.
24. Cf. R. Beck, E. Rahbari, op. cit.
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48. H. Hau, M. Massa, J. Peress: Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change, CEPR Discussion Paper No. 4862, 2005.
49. In the context of SWFs, S. Jen, D. K. Miles: Sovereign Wealth Funds and Bond and Equity Prices, Morgan Stanley Research Europe, 31 May 2007, argue that according to a modifi ed version of the R. J Barro: Rare Events and the Equity Premium, in: NBER Working Paper, No. 11310, 2005 model, the growing importance of SWFs could considerably drive down global risk aversion, raising US government bond yields by 30-40 basis points and the price-earnings ratio by 5-10%.
50. This includes Singapore Technologies Engineering, which had been excluded by the Petroleum Fund Advisory Commission on International Law, the predecessor of the Advisory Council. The exclusion of Kerr McGee was revoked on 24 May 2006.
51. Sectoral and country indices are taken from Standard and Poor's.
52. 2), excess returns over the divestment period and on the day of publication of the exclusion follow a normal distribution.
53. Norway's Government Pension Fund held, on average, around 0.5% of the market capitalisation of the respective companies, roughly equivalent to the daily turnover of an average stock. In comparison, the combined value of global sovereign wealth funds may reach up to 3% of global fi nancial assets.