Investment Restrictions and Contagion in Emerging Markets

34 Pages Posted: 3 Mar 2006

See all articles by A. Ilyina

A. Ilyina

International Monetary Fund (IMF)

Date Written: September 2005

Abstract

The objectives of this paper are: (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 investment restrictions; and (2) to analyze the sensitivity of the equilibrium price of an asset to shocks originating in other fundamentally unrelated asset markets for a given mix of common investors. The analysis confirms that certain combinations of investment restrictions (notably short-sale constraints and benchmark-based performance criteria) can create additional transmission mechanisms for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and on-going changes in the investor base for emerging market securities for the asset price volatility.

Keywords: Investment restrictions, Contagion, Emerging markets

JEL Classification: G11, G12

Suggested Citation

Ilyina, A., Investment Restrictions and Contagion in Emerging Markets (September 2005). Available at SSRN: https://ssrn.com/abstract=888059 or http://dx.doi.org/10.2139/ssrn.888059

A. Ilyina (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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