Working Paper: CEPR ID: DP7595
Authors: Chotibhak Jotikasthira; Christian T. Lundblad; Tarun Ramadorai
Abstract: We provide new evidence on the channels through which financial shocks are transmitted across international borders. Employing monthly data from 1996 to 2008 on over 1,000 developed country-domiciled mutual and hedge funds, we show that inflows and outflows experienced by these funds translate into significant changes in their portfolio allocations in 25 emerging markets. Despite funds' efforts to ameliorate the price impact of these portfolio allocation shifts, they substantially impact emerging market equity returns, and are associated with increases in co-movement between emerging and developed markets.
Keywords: Comovement; Contagion; Hedge Funds; International Finance; Mutual Funds
JEL Codes: F32; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Funding shocks experienced by developed country-domiciled global investment funds (F65) | Significant portfolio reallocations (G11) |
| Significant portfolio reallocations (G11) | Impact on emerging market equity returns (F69) |
| Funding shocks experienced by developed country-domiciled global investment funds (F65) | Impact on emerging market equity returns (F69) |
| Forced selling in emerging markets (G15) | Impact on emerging market equity returns (F69) |
| Significant outflows from funds (G23) | Reduce or eliminate holdings in approximately 80% of markets (G15) |
| Significant inflows to funds (F21) | Reduce or eliminate 21% of positions (J63) |
| Reallocations (D61) | Increased comovement between emerging and developed market returns (F69) |