Global capital reallocation during a systemic global economic shock: the case of COVID-19

Abstract

This paper examines how international equity allocations adjust during a systemic global shock, focusing on whether investors tilt toward domestic markets or toward a dominant benchmark destination. To test this, we exploit the COVID-19 pandemic as a unique global shock, providing an exceptional opportunity to observe investor behavior during a rare symmetric worldwide crisis. We develop and apply a novel Portfolio Tilt Ratio using data from 52 countries, spanning diverse levels of social globalization, and compare investor allocations for two time periods: before the COVID-19 turmoil (December 2019) and during the spread of COVID-19 (June 2020). Our results reveal no significant increase in broad home bias during the pandemic. Instead, we observe a statistically significant global reallocation toward the U.S. equity market. This effect is strongest among countries with higher levels of social globalization, highlighting the association between social connectedness and investor behavior during crises. These findings suggest that crisis-time portfolio adjustments can be destination specific and may involve a tilt toward benchmark markets, rather than reflecting a uniform flight home response. They further imply that countries with stronger social and informational globalization links may experience higher exposure to cross border capital shifts during global shocks, underscoring the need for coordination and financial stability monitoring. While our analysis focuses on the U.S. as the target market, the Portfolio Tilt Ratio provides a generalizable framework for examining global reallocations toward any destination market and may inform policy discussions on global financial stability and cross border resilience.