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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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Cited by:
  1. Marcel Fratzscher, 2012. "Capital Controls and Foreign Exchange Policy," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 15(2), pages 66-98, August.
  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 779, Banco de la Republica de Colombia.
  3. Claudio Raddatz ; & Sergio L. Schmukler, 2012. "On the International Transmission of Shocks: Micro – Evidence From Mutual Fund Portfolios," Working Papers Central Bank of Chile, Central Bank of Chile 668, Central Bank of Chile.
  4. Damien PUY, 2013. "Institutional Investors Flows and the Geography of Contagion," Economics Working Papers, European University Institute ECO2013/06, European University Institute.
  5. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomas, 2014. "International asset allocations and capital flows : the benchmark effect," Policy Research Working Paper Series, The World Bank 6866, The World Bank.
  6. Kristin Forbes, 2012. "The "Big C": Identifying Contagion," NBER Working Papers 18465, National Bureau of Economic Research, Inc.
  7. 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.
  8. Fratzscher, Marcel & Lo Duca, Marco & Straub, Roland, 2012. "A global monetary tsunami? On the spillovers of US Quantitative Easing," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9195, C.E.P.R. Discussion Papers.
  9. Opazo, Luis & Raddatz, Claudio & Schmukler, Sergio L., 2014. "Institutional investors and long-term investment : evidence from Chile," Policy Research Working Paper Series, The World Bank 6922, The World Bank.
  10. Marcel Fratzscher & Marco Lo Duca & Roland Straub, 2013. "On the International Spillovers of US Quantitative Easing," Discussion Papers of DIW Berlin 1304, DIW Berlin, German Institute for Economic Research.
  11. Michael G Papaioannou & Joonkyu Park & Jukka Pihlman & Han van der Hoorn, 2013. "Procyclical Behavior of Institutional Investors During the Recent Financial Crisis," IMF Working Papers, International Monetary Fund 13/193, International Monetary Fund.
  12. Yeyati, Eduardo Levy & Williams, Tomas, 2012. "Emerging economies in the 2000s : real decoupling and financial recoupling," Policy Research Working Paper Series, The World Bank 5961, The World Bank.

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