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 for Economic Research)
University of Hong Kong
May 31, 2013
WFA 2012 Las Vegas Meetings Paper
Swiss Finance Institute Research Paper No. 11-35
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: 60
Keywords: Financial Crisis Propagation, Fire Sales, Mutual Funds
JEL Classification: G11, G14, G23working papers series
Date posted: January 17, 2011 ; Last revised: June 1, 2013
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