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Managerial Incentives and Financial Contagion

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Author Info

  • Sujit Chakravorti

    (Federal Reserve Bank of Chicago)

  • Subir Lall

    (International Monetary Fund)

Abstract

This paper proposes a framework for comovements of asset prices with seemingly unrelated fundamentals, as an outcome of optimal portfolio strategies by fund managers. In emerging markets, dedicated managers outperforming a benchmark index and global managers maximizing absolute returns lead to systematic interactions between asset prices, without asymmetric information. The model determines optimal portfolio weights, the incidence of relative value strategies, and prices systematically deviating from fundamentals with limits to arbitraging this differential. Managerial compensation contracts, optimal at the firm level, may lead to inefficiencies at the macroeconomic level. We identify conditions when shocks in one emerging market affect others.

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File URL: http://128.118.178.162/eps/if/papers/0408/0408003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Finance with number 0408003.

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Length: 47 pages
Date of creation: 16 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpif:0408003

Note: Type of Document - pdf; pages: 47
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Web page: http://128.118.178.162

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Keywords: Financial Crises; Index Investors; Global Linkages;

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References

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  1. Laura E. Kodres & Matthew Pritsker, 2002. "A Rational Expectations Model of Financial Contagion," Journal of Finance, American Finance Association, vol. 57(2), pages 769-799, 04.
  2. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters, in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
  3. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
  4. Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
  5. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  6. Kaminsky, Graciela L. & Schmukler, Sergio L., 1999. "What triggers market jitters?: A chronicle of the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 537-560, August.
  7. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
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Cited by:
  1. Bunda, Irina & Hamann, A. Javier & Lall, Subir, 2009. "Correlations in emerging market bonds: The role of local and global factors," Emerging Markets Review, Elsevier, vol. 10(2), pages 67-96, June.
  2. Anna Ilyina, 2005. "Investment Restrictions and Contagion in Emerging Markets," IMF Working Papers 05/190, International Monetary Fund.
  3. Irina Bunda & A. Javier Hamann & Subir Lall, 2007. "Emerging Debt Markets: What Do Correlations and Spreads Tell Us?," Post-Print halshs-00424468, HAL.
  4. A. Javier Hamann & Irina Bunda & Subir Lall, 2010. "Correlations in Emerging Market Bonds," IMF Working Papers 10/6, International Monetary Fund.
  5. Irina Bunda & A. Javier Hamann & Subir Lall, 2005. "Comovements In Emerging Market Bond Returns: An Empirical Assessment," Post-Print halshs-00424466, HAL.
  6. Gaston Gelos, 2011. "International Mutual Funds, Capital Flow Volatility, and Contagion-A Survey," IMF Working Papers 11/92, International Monetary Fund.
  7. Raghuram G. Rajan, 2005. "Has Financial Development Made the World Riskier?," NBER Working Papers 11728, National Bureau of Economic Research, Inc.
  8. Coudert, Virginie & Gex, Mathieu, 2010. "Contagion inside the credit default swaps market: The case of the GM and Ford crisis in 2005," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(2), pages 109-134, April.
  9. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2010. "Exchange Rate Flexibility Across Financial Crises," Working Papers 2010-08, CEPII research center.
  10. Leitao, Joao & Armada, Manuel Rocha & Ferreira, Joaaquim, 2012. "Corruption and Co-Movements in European Listed Sport Companies: Did Calciocaos really matter?," MPRA Paper 42474, University Library of Munich, Germany.

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