Portfolio Constraints and Contagion in Emerging Markets

IMF Staff Papers, Volume 53, No. 3, 2007

24 Pages Posted: 28 Sep 2013

See all articles by A. Ilyina

A. Ilyina

International Monetary Fund (IMF)

Date Written: 2007

Abstract

The objective of this paper is twofold: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a “volatility shock” in one of the asset markets, under sufficiently realistic assumptions about the fund manager’s performance criteria and portfolio restrictions; and (2) to analyze how the composition of the investor base determines the sensitivity of equilibrium asset prices to a shock originating in one of the fundamentally unrelated asset markets. The analysis confirms that certain combinations of portfolio constraints (notably short-sale constraints and benchmark-based performance criteria) can create an additional transmission mechanism for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and ongoing changes in the investor base for asset price volatility in emerging markets.

Keywords: portfolio constraints, contagion, emerging markets

JEL Classification: G11, G12

Suggested Citation

Ilyina, A., Portfolio Constraints and Contagion in Emerging Markets (2007). IMF Staff Papers, Volume 53, No. 3, 2007, Available at SSRN: https://ssrn.com/abstract=2331541

A. Ilyina (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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