Sovereign wealth funds - Investment strategies and financial distress

Abstract

This article discusses the recent developments with regard to sovereign wealth funds (SWFs) and presents a simple model that illustrates their potential impact on global financial stability during periods of market distress. The model incorporates key institutional features of SWFs such as investment strategies, size and disclosure standards that could have a bearing on how shocks are transmitted across financial markets. The model suggests an asymmetric impact of SWFs during financial turmoil and booms, and provides an analytical framework to inform policy discussion with regard to the governance of SWFs. © 2010 Macmillan Publishers Ltd.