Economic policy uncertainty and institutional investment returns: The case of New Zealand

Economic policy uncertainty and fund flow performance sensitivity: Evidence from New Zealand

“…Fund Size is log(assets); Fund Age is the average number of months in fund's existence; Sharpe ratio is defined as the excess fund returns (in excess of risk‐free rate) per unit of 12‐month rolling standard deviation in returns; and Average Tracking Error is the 12‐month rolling standard deviation of abnormal returns, where abnormal return is the difference between monthly fund and NZX market index returns. Idiosyncratic volatility (IV) is computed relative to the benchmark Fama–French (1993) 5‐factor model via rolling regressions as per Ang et al (2006); downside risk is measured by the Value at Risk values as per Ali, Badshah, and Demirer (2022) and Ali, Badshah, Demirer, and Hegde (2022); momentum (MOM) is the cumulative return over the trailing 12‐month period; monthly fund flows are based on the flow measure of Franzoni and Schmalz (2017). Return Volatility is the time‐series standard deviation of the fund's monthly returns over t − 1 to t − 11 months.…”

“…To capture policy uncertainty (i.e., EPU), we utilize the economic policy uncertainty index for New Zealand, recently proposed by Ali, Badshah, and Demirer (2022) and Ali, Badshah, Demirer, and Hegde (2022), that is constructed based on the text‐based approach of Baker et al (2016). Specifically, the index is constructed by parsing the text archives available in Newztext for four major NZ news outlets including NZ‐Herald, Fairfax, Stuff and http://interest.co.nz.…”

“…In the current study, we extend this emerging literature to the New Zealand managed fund industry that accounts for about 85% of the equity investments in the country Ali, Badshah, Demirer, & Hegde, 2022) by testing the implications of policy uncertainty on the sensitivity of fund flows to past performance. To do so, we utilize a recently developed EPU index for New Zealand that is shown to capture a significant risk premium in the cross-section of fund returns, both statistically and economically.…”

“…1 1 These recent works, thus, add a new perspective to the relationship between stock market dynamics and policy uncertainty that is shown to drive return and volatility dynamics in financial markets (see Ali, Badshah, & Demirer, 2022; Ali, Badshah, Demirer, & Hegde, 2022; Kelly et al, 2016; Liu & Zhang, 2015; Pástor & Veronesi, 2013; You et al, 2017; among others). …”

Policy uncertainty and stock market volatility revisited: The predictive role of signal quality

“…At the same time, uncertainty surrounding policy changes creates a risk factor that investors seek compensation for when it comes to the valuation of risky assets, which, in turn, contributes to a risk‐based channel that links policy uncertainty to financial market returns. Accordingly, a large number of studies have documented evidence of a significant EPU effect on stock market (e.g., Brogaard & Detzel, 2015; Dakhlaoui & Aloui, 2016; You et al, 2017) and institutional investment returns (Ali et al, 2022), whereas others have established a link to volatility and covariance patterns across the stock, bond, and commodity markets (Badshah et al, 2019; Liu et al, 2017; Liu & Zhang, 2015).…”