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Investor behaviour and contagion

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  • Todd Feldman

Abstract

This paper examines two open questions in international finance. First, what is the relative importance of different linkages in causing global financial crises? The second question concerns whether or not investor behaviour affects contagion. I use a two-market agent-based model that incorporates insights from behavioural finance to answer these open questions. Simulated managers only affect contagion when they control a small proportion of the total assets in each market. This evidence may partly explain the Russian contagion to Brazil where direct linkages did not exist. In addition, results show that global managers must make up between 40 and 50% of both local markets in order to become a more important linkage than that of international trade.

Suggested Citation

  • Todd Feldman, 2014. "Investor behaviour and contagion," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 725-735, April.
    • Handle: RePEc:taf:quantf:v:14:y:2014:i:4:p:725-735
    DOI: 10.1080/14697688.2013.860233
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    References listed on IDEAS

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    1. Barry Eichengreen & Andrew K. Rose, 1999. "Contagious Currency Crises: Channels of Conveyance," NBER Chapters, in: Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues, pages 29-56, National Bureau of Economic Research, Inc.
    2. Kaminsky,Graciela & Lyons,Richard K. & Schmukler,Sergio L., 2001. "Mutual fund investment in emerging markets - an overview," Policy Research Working Paper Series 2529, The World Bank.
    3. Kristin J. Forbes, 2002. "Are Trade Linkages Important Determinants of Country Vulnerability to Crises?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 77-132, National Bureau of Economic Research, Inc.
    4. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
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