Non-technical summary

Research Question

This paper investigates how international bond and equity fund flows are affected by global uncertainty. Additionally, we aim to identify factors that may amplify or dampen the effects of uncertainty. Overall, we analyze fund flows into 25 emerging market and 21 advanced economies over the period from August 2005 to December 2023.

Contribution

We estimate a structural global uncertainty shock using a Proxy-SVAR model, focusing on financial market variables. The shock enables us to estimate local projections of fund flow data in order to analyze the effects of uncertainty on fund flows for a broad range of emerging and advanced economies. Cross-sectional regressions of flow-sensitivity on macroeconomic and institutional indicators provide new insights into factors that may amplify or dampen the effects of uncertainty.

Results

Our results show that uncertainty shocks have much stronger negative effects on fund flows in emerging economies for both bond and equity flows. Our results also show that bond fund flows are much more strongly affected by uncertainty shocks compared to equity flows over both the short and the medium term. Finally, we exploit the cross­sectional dimension of responses of flows to uncertainty and find that both macroeconomic developments and institutional characteristics (e.g. growth, interest rates, and external debt) relate to the intensity of outflows in the aftermath of uncertainty shocks.