International Fund Allocation under Economic Policy Uncertainty Shock

Abstract This paper focuses on the impact of economic policy uncertainty on international asset allocation and international capital flows. Our results show that economic policy uncertainty shocks have a negative impact on the international asset allocation, which can be explained from the real economic activity channel and the expectation channel. We also explore a full fledge of country level heterogeneities about the economic policy uncertainty shocks on international asset allocation. Specifically, good institutional quality, transparent information, good information access to the international financial market and bilateral informational link help to alleviate the negative effect that economic policy uncertainty shock does to asset allocation. And a healthy public and external sector also help to alleviate the negative effect. While the importance of government in the economy amplifies the negative effect of economic policy uncertainty shocks to asset allocation. JEL classification numbers: E44, G11, G15. Keywords: Economic policy uncertainty, Global fund allocation, Institutional quality, Global imbalance.