Wealth Transfers, Contagion, and Portfolio Constraints / Anna Pavlova, Roberto Rigobon.

Format:

Book

Author/Creator:

Pavlova, Anna.

Contributor:

National Bureau of Economic Research.

Rigobon, Roberto.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11440.

NBER working paper series no. w11440

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

This paper examines the co-movement among stock market prices and exchange rates within a three-country Center-Periphery dynamic equilibrium model in which agents in the Center country face portfolio constraints. In our model, international transmission occurs through the terms of trade, through the common discount factor for cash flows, and, finally, through an additional channel reflecting the tightness of the portfolio constraints. Portfolio constraints are shown to

generate endogenous wealth transfers to or from the Periphery countries. These implicit transfers are responsible for creating contagion among the terms of trade of the Periphery countries, as well as their stock market prices. Under a portfolio constraint limiting investment of the Center country in the stock markets of the Periphery, stock prices also exhibit a flight to quality: a negative shock to one of the Periphery countries depresses stock prices throughout the Periphery,

while boosting the stock market in the Center.

Notes:

Print version record

June 2005.