International portfolio investment: does the uncertainty matter?

Abstract

PurposeThis study investigates the effect of global and domestic uncertainty on the dynamics of portfolio investment in 21 economies (mostly advanced and larger emerging economies) over the period 2001–2016.Design/methodology/approachSpecifically, the evolution of the net portfolio equity investment inflows (FPI net inflows) and the evolution of net portfolio investment (FPI net) are investigated in a context in which the degree and the volatility of domestic economic policy uncertainty (EPU) and world uncertainty index (WUI) varied. The authors provide an empirical analysis through the use of the sequential (two-stage) estimation of linear panel data models for unbalanced panel data.FindingsAn increase in the degree and volatility of domestic EPU has a significant negative influence on FPI net inflows while an increase in WUI has a significant positive one. Notably, a simultaneous increase in the domestic EPU and WUI enhances the net inflows of FPI whereas a simultaneous increase in the volatility of these indicators reduces the net inflows of FPI. An increase in the degree and volatility of both domestic EPU and WUI have significant positive effect on the net portfolio investment implying that a large net portfolio investment is going out of the country.Research limitations/implicationsThe results of this study encourage international investors to consider uncertainty indicators (and more specifically their variations) in their portfolio strategy to optimize their position on the international markets. The findings of this study invite policy makers from large countries to reduce the perceived domestic uncertainty since this parameter can influence international investors' sensitivity and willingness to diversify their position out of the country.Originality/valueThe authors' approach focuses on the variations of uncertainty (existing literature mainly works with the indicators). While the results confirm the role played by large markets in international portfolio investment management, but it nuances the changes in the portfolio management behaviors toward other markets when facing a changing uncertainty.