Asset Fire Sales and Purchases and the International Transmission of Funding Shocks
Southern Methodist University (SMU) - Edwin L. Cox School of Business; University of North Carolina Kenan-Flagler Business School
Christian T. Lundblad
University of North Carolina Kenan-Flagler Business School
Imperial College london; Centre for Economic Policy Research (CEPR)
January 11, 2012
Journal of Finance Forthcoming
AFA 2011 Denver Meetings Paper
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
Date posted: December 16, 2009 ; Last revised: September 19, 2012
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