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The Role of Equity Funds in the Financial Crisis Propagation

Swiss Finance Institute Research Paper No. 11-35

WFA 2012 Las Vegas Meetings Paper

45 Pages Posted: 17 Jan 2011 Last revised: 20 Jan 2016

Harald Hau

University of Geneva - Geneva Finance Research Institute; Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Sandy Lai

University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2013

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 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.

Keywords: Financial Crisis, Crisis Spillover Effect, Mutual Fund Ownership

JEL Classification: G11, G14, G23

Suggested Citation

Hau, Harald and Lai, Sandy, The Role of Equity Funds in the Financial Crisis Propagation (May 31, 2013). Swiss Finance Institute Research Paper No. 11-35 ; WFA 2012 Las Vegas Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1742065 or http://dx.doi.org/10.2139/ssrn.1742065

Harald Hau (Contact Author)

University of Geneva - Geneva Finance Research Institute ( email )

40, Boulevard du Pont d'Arve
CH 1211 Geneva 4
Geneva
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Sandy Lai

University of Hong Kong ( email )

Faculty of Business and Economics
K.K. Leung Building, Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

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