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Rational contagion and the globalization of securities markets

Listed author(s):
  • Calvo, Guillermo A.
  • Mendoza, Enrique G.

This paper argues that the globalization of securities markets may promote contagion among investors by weakening incentives for gathering costly country-specific information and by strengthening incentives for imitating arbitrary market portfolios. In the presence of short-selling constraints, the utility gain of gathering information at a fixed cost converges to a constant level and may diminish as securities markets grow. Moreover, if a portfolio manager's marginal cost for yielding below-market returns exceeds the marginal gain for above-market returns, there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows. Numerical simulations suggest that these frictions can have significant quantitative implications and they may induce large capital flows in emerging markets.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022-1996(99)00038-0
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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 51 (2000)
Issue (Month): 1 (June)
Pages: 79-113

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Handle: RePEc:eee:inecon:v:51:y:2000:i:1:p:79-113
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. repec:fth:starer:98-25 is not listed on IDEAS
  2. Robert J. Shiller & John Pound, 1986. "Survey Evidence on Diffusion of Investment Among Institutional Investors," NBER Working Papers 1851, National Bureau of Economic Research, Inc.
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  4. Obstfeld, Maurice, 1994. "Risk-Taking, Global Diversification, and Growth," American Economic Review, American Economic Association, vol. 84(5), pages 1310-1329, December.
  5. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
  6. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
  7. Robert J. Shiller & John Pound, 1986. "Survey Evidence on Diffusion of Interest Among Institutional Investors," Cowles Foundation Discussion Papers 794, Cowles Foundation for Research in Economics, Yale University.
  8. S. Rao Aiyagari & Mark Gertler, 1999. ""Overreaction" of Asset Prices in General Equilibrium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 3-35, January.
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  10. Shiller, Robert J, 1995. "Conversation, Information, and Herd Behavior," American Economic Review, American Economic Association, vol. 85(2), pages 181-185, May.
  11. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
  12. 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.
  13. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
  14. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
  15. Enrique G. Mendoza, 1991. "Capital Controls and the Gains from Trade in a Business Cycle Model of a Small Open Economy," IMF Staff Papers, Palgrave Macmillan, vol. 38(3), pages 480-505, September.
  16. Mendoza, Enrique G., 1997. "Terms-of-trade uncertainty and economic growth," Journal of Development Economics, Elsevier, vol. 54(2), pages 323-356, December.
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