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Asset Fire Sales and Purchases and the International Transmission of Funding Shocks

82 Pages Posted: 16 Dec 2009 Last revised: 19 Sep 2012

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Date Written: January 11, 2012

Abstract

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.

Keywords: co-movement, contagion, international finance, mutual funds, asset fire sales

JEL Classification: F32, G12, G15

Suggested Citation

Jotikasthira, Chotibhak and Lundblad, Christian T. and Ramadorai, Tarun, Asset Fire Sales and Purchases and the International Transmission of Funding Shocks (January 11, 2012). Journal of Finance Forthcoming; AFA 2011 Denver Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1523628 or http://dx.doi.org/10.2139/ssrn.1523628

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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