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Asset Fire Sales and Purchases and the International Transmission of Funding ShocksPab JotikasthiraUniversity of North Carolina Kenan-Flagler Business School Christian T. LundbladUniversity of North Carolina Kenan-Flagler Business School Tarun RamadoraiUniversity of Oxford - Said Business School; University of Oxford - Oxford-Man Institute of Quantitative Finance; Centre for Economic Policy Research (CEPR) January 11, 2012 Journal of Finance Forthcoming AFA 2011 Denver Meetings Paper Abstract: We uncover a new channel through which shocks are transmitted across international markets. Investor flows to funds domiciled in developed markets force significant changes in their portfolio allocations to emerging markets. These forced trades affect equity prices, correlations between emerging markets, and the developed-market betas of emerging markets. These funding-driven fire sale effects are related to, but distinct from those arising purely from high fund holdings or high overlapping ownership of emerging markets in fund portfolios. A simple model and calibration exercise highlight the importance to these findings of 'push' effects from funds' domicile countries, and 'co-ownership spillover' between markets with overlapping fund ownership.
Number of Pages in PDF File: 82 Keywords: co-movement, contagion, international finance, mutual funds, asset fire sales JEL Classification: F32, G12, G15 working papers seriesDate posted: December 16, 2009 ; Last revised: September 19, 2012Suggested CitationContact Information
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