ABSTRACT
We investigate the relationships among economic policy uncertainty (EPU), equity fund flows (EFF), and the Colombian stock market. Results show adverse impacts of domestic, global, and regional EPUs on Colombia’s stock returns and EFF. Global and regional EPUs transmit to Colombian EPU which makes the market vulnerable to uncertainty shocks. A global EPU shock reduces returns by 2.2% the following month, raises Colombian EPU by 12%, and reduces EFF by 0.24%. Furthermore, heightened EPU increases liquidity and reduces stock returns. Our results suggest a feedback loop where uncertainty shocks increase trading, fuel domestic uncertainty, and reduce equity prices.
Acknowledgments
We want to thank Sebastian Mertl from Sparkasse OÖ Kapitalanlagegesellschaft m.b.H. for help with obtaining data. Joseph J. French would like to acknowledge that this research was developed (in part) under grants from the U.S. Department of Education through its Centers for International Business Education and Research at University of Colorado Denver and Brigham Young University. This research does not necessarily represent the policies of the U.S. Department of Education.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1. We fail to find a significant effect of Mexican EPU on EFF in Colombia.
2. For a detailed literature review, please see Al-Thaqeb and Algharabali (Citation2019).
3. We note that the coefficient for the capital control dummy in the EFF equation is negative as expected. Results are available on request.
4. Data are based on a large sample of reporting funds. More than 18,000 reporting equity funds cover around 96% of the assets under management of the global investment fund industry (as of September 2019, Informa Financial Intelligence Citation2020a).
5. The results are available on request.
6. Granger causality tests are also performed for an alternative measure of liquidity, namely volume. The results are like those for MVTN and are available on request.
7. We use a GEPU with purchase power parity weightings. The results are very similar with current weights and are available on request.
8. All models were re-estimated using standard VAR methods and results were like those using Bayesian inference methods. These results are available upon request.