The Role of Equity Funds in the Financial Crisis Propagation
49 Pages Posted: 1 Mar 2012
Date Written: February 2012
The early stage of the recent 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.
Keywords: Financial Crisis Propagation, Fire Sales, Mutual Funds
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation