The Role of Equity Funds in the Financial Crisis Propagation

Hau, Harald; Lai, Sandy

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The Role of Equity Funds in the Financial Crisis Propagation

CEPR Discussion Paper No. DP8819

49 Pages Posted: 1 Mar 2012

See all articles by Harald Hau

Harald Hau

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

Sandy Lai

University of Hong Kong

There are 2 versions of this paper

Date Written: February 2012

Abstract

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

Hau, Harald and Lai, Sandy, The Role of Equity Funds in the Financial Crisis Propagation (February 2012). CEPR Discussion Paper No. DP8819, Available at SSRN: https://ssrn.com/abstract=2013810