Working Paper: NBER ID: w17358
Authors: Claudio Raddatz; Sergio L. Schmukler
Abstract: This paper uses micro-level data on mutual funds from different financial centers investing in equity and bonds to study how investors and managers behave and transmit shocks across countries. The paper finds that the volatility of mutual fund investments is driven quantitatively by both the underlying investors and fund managers through (i) injections/redemptions into each fund and (ii) managerial changes in country weights and cash. Both investors and managers respond to country returns and crises and adjust their investments substantially, for example, generating large reallocations during the global crisis. Their behavior tends to be pro-cyclical, reducing their exposure to countries during bad times and increasing it when conditions improve. Managers actively change country weights over time, although there is significant short-run pass-through from returns to these weights. Consequently, capital flows from mutual funds do not seem to have a stabilizing role and expose countries in their portfolios to foreign shocks.
Keywords: mutual funds; financial crisis; international transmission of shocks; investor behavior; manager behavior
JEL Codes: F3; F32; F36; G01; G1; G11; G15; G2; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor behavior (G41) | Capital flows (F32) |
| Domestic economic conditions (F49) | International investment behavior (F21) |
| Market conditions (D49) | Managerial decisions on asset allocation (G11) |
| Shocks faced by managers (M54) | Transmission of financial crises (F65) |
| Investor behavior (G41) | Market stability (D53) |
| Managers and investors (G40) | Capital flows (F32) |