Do sovereign wealth funds (SWFs) stabilize stock markets? Does investment behaviour of SWFs with different objectives have a destabilizing effect on the market? The foreign investments of SWFs played a pivotal role in the stabilization of international stock markets during the recent financial crisis. Considering the heterogeneity of SWF groups and measuring the tail risk of SWF investments, we find that SWF investments generally lead to destabilizing effects on the stock markets; however, SWFs with savings objectives provide a stabilizing impact, especially in crisis periods. In addition, SWFs are found to provide liquidity significantly in stock markets.
JEL Classification: G14, G15, G18, G30
Keywords: Sovereign wealth fund, Tail risk, Marginal expected shortfall, Liquidity effect
