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The Role of Equity Funds in the Financial Crisis PropagationHarald HauUniversity 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) Sandy LaiUniversity of Hong Kong June 2, 2012 Swiss Finance Institute Research Paper No. 11-35 Abstract: 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 10.9% to the overall stock market downturn; (ii) distressed fire sales and the associated price discounts are concentrated among those exposed stocks which perform relatively well; and (iii) stocks with higher fund ownership generally performed much better throughout the crisis.
Number of Pages in PDF File: 52 Keywords: Financial Crisis Propagation, Fire Sales, Mutual Funds JEL Classification: G11, G14, G23 working papers seriesDate posted: January 17, 2011 ; Last revised: June 3, 2012Suggested CitationContact Information
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