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On the international transmission of shocks : micro-evidence from mutual fund portfolios

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  • Raddatz, Claudio
  • Schmukler, Sergio L.

Abstract

Using micro-level data on mutual funds from different financial centers investing in equity and bonds, this paper analyzes how investors and managers behave and transmit shocks across countries. The paper shows that the volatility of mutual fund investments is quantitatively driven by investors through injections of capital into, or redemptions out of, each fund, and by managers changing the country weights and cash in their portfolios. Both investors and managers respond to returns and crises, and substantially adjust their investments accordingly. These mechanisms generated large capital reallocations during the global financial crisis. Their behavior tends to be pro-cyclical, reducing their exposure to countries experiencing crises and increasing it when conditions improve. Managers actively change country weights over time, although there is significant short-run"pass-through,"meaning that price changes affect country weights. Consequently, capital flows from mutual funds do not seem to stabilize markets and instead expose countries to foreign shocks.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6072.

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Date of creation: 01 May 2012
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Handle: RePEc:wbk:wbrwps:6072

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Keywords: Mutual Funds; Debt Markets; Emerging Markets; Investment and Investment Climate; Currencies and Exchange Rates;

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Citations

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Cited by:
  1. Claudio Raddatz & Sergio L. Schmukler, 2011. "On the International Transmission of Shocks: Micro-Evidence from Mutual Fund Portfolios," NBER Working Papers 17358, National Bureau of Economic Research, Inc.
  2. José E. Gómez-González & Luis Fernando Melo Velandia, 2013. "Efectos de “ángeles caídos” en el mercado accionario colombiano: estudio de eventos del caso Interbolsa," BORRADORES DE ECONOMIA 010977, BANCO DE LA REPÚBLICA.
  3. Eduardo Levy Yeyati & Tomas Williams, 2011. "Emerging economies in the 2000s:Real decoupling and financial recoupling," Business School Working Papers 2011-06_correccion, Universidad Torcuato Di Tella.
  4. Fratzscher, Marcel & Lo Duca, Marco & Straub, Roland, 2012. "A global monetary tsunami? On the spillovers of US Quantitative Easing," CEPR Discussion Papers 9195, C.E.P.R. Discussion Papers.
  5. Fratzscher, Marcel & Lo Duca, Marco & Straub, Roland, 2013. "On the international spillovers of US quantitative easing," Working Paper Series 1557, European Central Bank.
  6. Fratzscher, Marcel, 2012. "Capital controls and foreign exchange policy," Working Paper Series 1415, European Central Bank.
  7. Michael G Papaioannou & Joonkyu Park & Jukka Pihlman & Han van der Hoorn, 2013. "Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges," IMF Working Papers 13/193, International Monetary Fund.
  8. Kristin Forbes, 2012. "The "Big C": Identifying Contagion," NBER Working Papers 18465, National Bureau of Economic Research, Inc.
  9. Damien PUY, 2013. "Institutional Investors Flows and the Geography of Contagion," Economics Working Papers ECO2013/06, European University Institute.
  10. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomas, 2014. "International asset allocations and capital flows : the benchmark effect," Policy Research Working Paper Series 6866, The World Bank.
  11. Henri Audigé, 2014. "Net flows to emerging markets’ funds and the U.S. monetary policy after the subprime crisis," EconomiX Working Papers 2014-23, University of Paris West - Nanterre la Défense, EconomiX.

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