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 non-financial stocks owned by the respective funds. We find that (i) ownership links to these "distressed equity funds" lead to large underperformance of the most exposed non-financial stocks, and in aggregate this contributes an additional 10.5% to the overall stock market downturn; (ii) distressed fire sales and the associated price discounts are concentrated among those exposed stocks that perform relatively well; and (iii) stocks with higher fund ownership generally performed much better throughout the crisis.
Number of Pages in PDF File: 46
Keywords: Financial Crisis Propagation, Fire Sales, Mutual Funds
JEL Classification: G11, G14, G23
Date posted: January 17, 2011 ; Last revised: February 6, 2014
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