Managers, Investors, and Crises: Mutual Fund Strategies in Emerging Markets

37 Pages Posted: 14 Aug 2000

See all articles by Graciela Kaminsky

Graciela Kaminsky

National Bureau of Economic Research (NBER); George Washington University - Department of Economics

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 4 versions of this paper

Date Written: July 2000

Abstract

This study of an important class of investors-U.S. mutual funds-finds that mutual funds do engage in momentum trading (buying winners and selling losers). They also engage in contagion trading strategies (selling assets from one country when asset prices fall in another).

Kaminsky, Lyons, and Schmukler address the trading strategies of mutual funds in emerging markets. The data set they develop permits analyses of these strategies at the level of individual portfolios.

A methodologically novel feature of their analysis: they disentangle the behavior of fund managers from that of investors.

For both managers and investors, they strongly reject the null hypothesis of no momentum trading. Funds' momentum trading is positive: they systematically buy winners and sell losers.

Contemporaneous momentum trading (buying current winners and selling current losers) is stronger during crises, and stronger for fund investors than for fund managers.

Lagged momentum trading (buying past winners and selling past losers) is stronger during noncrises, and stronger for fund managers.

Investors also engage in contagion trading-selling assets from one country when asset prices fall in another.

These findings are based on data about mutual funds that represent only 10 percent of the market capitalization in the countries considered. Were it a larger share of the market, finding counterparties for their trades (the investors who buy when they sell and sell when they buy) would be difficult-and the premise that funds respond to contemporaneous returns rather than causing them would become tenuous.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand capital flows to developing countries. The study was funded by the Bank`s Research Support Budget under the research project "Mutual Fund Investment in Developing Countries." The authors may be contacted at graciela@gwu.edu, lyons@haas.berkeley.edu, or sschmukler@worldbank.org.

JEL Classification: F3, G1, G2

Suggested Citation

Kaminsky, Graciela and Lyons, Richard K. and Schmukler, Sergio, Managers, Investors, and Crises: Mutual Fund Strategies in Emerging Markets (July 2000). World Bank Policy Research Working Paper No. 2399. Available at SSRN: https://ssrn.com/abstract=229135

Graciela Kaminsky

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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George Washington University - Department of Economics ( email )

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

Richard K. Lyons

University of California, Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-642-1059 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

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