The Role of Equity Funds in the Financial Crisis Propagation
University of Geneva - Geneva Finance Research Institute; Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)
University of Hong Kong
May 31, 2013
Swiss Finance Institute Research Paper No. 11-35
WFA 2012 Las Vegas Meetings Paper
The early stage of the 2007-08 financial crisis was marked by large value losses for bank stocks. This paper identifies the equity funds most affected by this valuation shock and examines its consequences for the nonfinancial stocks owned by the respective funds. We document three key empirical findings. First, ownership links to these distressed equity funds lead to large temporary underperformance of the most exposed nonfinancial stocks. Second, distressed equity funds make the better performing stocks in their portfolio the preferred liquidation choice, which implies clustering of fire sale discounts among stocks in the high return quantiles. Third, stocks with higher overall fund ownership generally performed better throughout the crisis.
Number of Pages in PDF File: 45
Keywords: Financial Crisis, Crisis Spillover Effect, Mutual Fund Ownership
JEL Classification: G11, G14, G23
Date posted: January 17, 2011 ; Last revised: January 20, 2016
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