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The Role of Equity Funds in the Financial Crisis Propagation

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  • Hau, Harald
  • Lai, Sandy

Abstract

The early stage of the recent financial crisis was marked by large value losses for bank stocks. This paper identifies the equity funds most affected by this valuation shock and examines its consequences for the non-financial stocks owned by the respective funds. We find that (i) ownership links to these 'distressed equity funds' lead to large underperformance of the most exposed non-financial stocks, and in aggregate this contributes an additional 10.9% to the overall stock market downturn; (ii) distressed fire sales and the associated price discounts are concentrated among those exposed stocks which perform relatively well; and (iii) stocks with higher fund ownership generally performed much better throughout the crisis.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8819.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8819

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Keywords: Financial Crisis Propagation; Fire Sales; Mutual Funds;

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Cited by:
  1. Hau, Harald & Lai, Sandy, 2012. "Real Effects of Stock Underpricing," CEPR Discussion Papers 8820, C.E.P.R. Discussion Papers.
  2. Stavros Peristiani & Vanessa Savino, 2011. "Are credit default swaps associated with higher corporate defaults?," Staff Reports 494, Federal Reserve Bank of New York.

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