How Does Geopolitics Affect Asset Allocations? What the Institutional Investors Do to Enhance Returns

Do geopolitical tensions between countries influence the cross-border asset allocation of investment funds? Yes!.

Using our ICRG risk metrics as a means of developing a proxy for ‘institutional quality,’ the authors of this IMF Working Paper estimate gravity models and find that investment funds allocate smaller shares of their portfolios to recipient countries that are geopolitically more distant to their country of origin.

They also found an investment diversion effect: a recipient country attracts additional investments when its source countries get geopolitically more distant to third-party countries.

“Geopolitical distance” is measured by the dissimilarity in countries’ voting behavior in the United Nations General Assembly.

The study also shows that countries with lower institutional quality are more vulnerable to geopolitical shifts, and geopolitical tensions can generate cross-border investment diversion, whereby a recipient country attracts additional investments when the geopolitical distance between its source countries and their financial partner countries increases.

(https://lnkd.in/e-JcvkEx)

Our data drives.

The PRS Group
www.PRSGroup.com
www.christophermckee.net