Working Paper: NBER ID: w9241
Authors: Jessica Tjornhom Donohue; Kenneth A. Froot
Abstract: The portfolio flows of institutional investors have been found to be highly persistent across countries and individual investment funds. This paper investigates the source of this persistence in emerging market equities. We employ the decomposition methodology of Froot and Tjornhom (2002), which decomposes the persistence of flows into four components: (i) own-country, own-fund persistence (which might arise from informed trading within each country by individual funds); (ii) own-country, cross-fund persistence (which might arise from asynchronicities across funds); (iii) cross-country, own-fund persistence (which might arise from asynchonicities within a fund) and (iv) cross-country, cross-fund persistence (which might arise from other reaction lags such as contagion across both countries and funds). We find evidence that all four components are positive in emerging markets. Our results differ from those in developed countries, in that we attribute approximately 10%-20% of total persistence to cross-country effects (iii) and (iv). These findings are consistent with stories of contagion, which suggest that demand shifts move predictably from one country to another. They cannot easily be explained by informed trading alone or by wealth effects.
Keywords: emerging markets; equity flows; institutional investors; persistence; contagion
JEL Codes: G15; F21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| institutional investor flows into emerging markets (F21) | persistence in flows (E50) |
| own-country own-fund persistence (F21) | persistence in flows (E50) |
| own-country cross-fund persistence (F21) | persistence in flows (E50) |
| cross-country own-fund persistence (G32) | persistence in flows (E50) |
| cross-country cross-fund persistence (G23) | persistence in flows (E50) |
| informed trading behaviors (G14) | own-country own-fund persistence (F21) |
| non-simultaneous trading across different funds (G23) | own-country cross-fund persistence (F21) |
| flows into one market (G10) | flows into another market within the same fund (G10) |
| outflows from one country (F32) | subsequent outflows from other countries by different funds (F29) |