When in peril, retrench : testing the portfolio channel of contagion / Fernando A. Broner, R. Gaston Gelos, Carmen Reinhart.

Format:

Book

Author/Creator:

Broner, Fernando, author.

Gelos, Gaston, author.

Reinhart, Carmen M., author.

Series:

Working Paper Series (National Bureau of Economic Research) ; Number w10941.

Working Paper Series (National Bureau of Economic Research) ; Number w10941

Language:

English

Subjects (All):

Mutual funds--Econometric models.

Mutual funds.

Financial crises--Econometric models.

Financial crises.

Physical Description:

1 online resource (34 pages) : illustrations.

Place of Publication:

Cambridge, Massachusetts : National Bureau of Economic Research, 2004.

Summary:

One plausible mechanism through which financial market shocks may propagate across countries is through the effect of past gains and losses on investors' risk aversion. The paper first presents a simple model examining how heterogeneous changes in investors' risk aversion affects portfolio decisions and stock prices. Second, the paper shows empirically that, when funds' returns are below average, they adjust their holdings toward the average (or benchmark) portfolio. In other words, they tend to sell the assets of countries in which they were "overweight", increasing their exposure to countries in which they were "underweight." Based on this insight, the paper discusses a matrix of financial interdependence reflecting the extent to which countries share overexposed funds. Comparing this measure to indices of trade or bank linkages indicates that our index can improve predictions about which countries are likely to be affected by contagion from crisis centers.

Notes:

Description based on publisher supplied metadata and other sources.