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Investment Restrictions and Contagion in Emerging Markets

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  • Anna Ilyina

Abstract

The objectives of this paper are: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a "volatility shock" in one of the asset markets, under sufficiently realistic assumptions about the fund manager''s performance criteria and investment restrictions; and (2) to analyze the sensitivity of the equilibrium price of an asset to shocks originating in other fundamentally unrelated asset markets for a given mix of common investors. The analysis confirms that certain combinations of investment restrictions (notably short-sale constraints and benchmark-based performance criteria) can create additional transmission mechanisms for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and on-going changes in the investor base for emerging market securities for the asset price volatility.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/190.

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Length: 34
Date of creation: 01 Sep 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/190

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Related research

Keywords: Emerging markets; Economic models; investors; asset markets; investment restrictions; institutional investors; mutual funds; hedge; hedge funds; bond; financial contagion; investment portfolio; investor protection; international capital markets; financial markets; international capital; fixed income; investment banks; investment decisions; bond fund; bond index; corporate bond market; high-yield bond; bond indices; sovereign bonds; expected returns; eurobonds; emerging market bond; equity markets; market bond; denominated bond; excessive ? risk; liquid markets; bond market; bonds;

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  1. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 79-113, June.
  2. Reinhart, Carmen & Kaminsky, Graciela, 1998. "On crises, contagion, and confusion," MPRA Paper 13709, University Library of Munich, Germany.
  3. Sujit Chakravorti & Subir Lall, 2004. "Managerial Incentives and Financial Contagion," International Finance, EconWPA 0408003, EconWPA.
  4. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, American Finance Association, vol. 57(2), pages 769-799, 04.
  5. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  6. Sunil Sharma & Sushil Bikhchandani, 2000. "Herd Behavior in Financial Markets: A Review," IMF Working Papers 00/48, International Monetary Fund.
  7. Garry J. Schinasi & R. Todd Smith, 2000. "Portfolio Diversification, Leverage, and Financial Contagion," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 1.
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