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Asset fire sales and purchases and the international transmission of financial shocks

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  • Jotikasthira, Chotibhak
  • Lundblad, Christian T
  • Ramadorai, Tarun

Abstract

We provide new evidence on the channels through which financial shocks are transmitted across international borders. Employing monthly data from 1996 to 2008 on over 1,000 developed country-domiciled mutual and hedge funds, we show that inflows and outflows experienced by these funds translate into significant changes in their portfolio allocations in 25 emerging markets. Despite funds' efforts to ameliorate the price impact of these portfolio allocation shifts, they substantially impact emerging market equity returns, and are associated with increases in co-movement between emerging and developed markets.

Suggested Citation

  • Jotikasthira, Chotibhak & Lundblad, Christian T & Ramadorai, Tarun, 2009. "Asset fire sales and purchases and the international transmission of financial shocks," CEPR Discussion Papers 7595, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:7595
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    Cited by:

    1. Rama Cont & Lakshithe Wagalath, 2012. "Fire Sales Forensics: Measuring Endogenous Risk," Working Papers hal-00697224, HAL.
    2. Raddatz, Claudio & Schmukler, Sergio L., 2012. "On the international transmission of shocks: Micro-evidence from mutual fund portfolios," Journal of International Economics, Elsevier, vol. 88(2), pages 357-374.
    3. Fratzscher, Marcel, 2012. "Capital flows, push versus pull factors and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 341-356.
    4. Bubák, Vít & Kocenda, Evzen & Zikes, Filip, 2011. "Volatility transmission in emerging European foreign exchange markets," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2829-2841, November.
    5. Andrei Shleifer & Robert Vishny, 2011. "Fire Sales in Finance and Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 29-48, Winter.
    6. Sebnem Kalemli-Ozcan & Elias Papaioannou & José-Luis Peydró, 2013. "Financial Regulation, Financial Globalization, and the Synchronization of Economic Activity," Journal of Finance, American Finance Association, vol. 68(3), pages 1179-1228, June.
    7. Cristina Cella & Andrew Ellul & Mariassunta Giannetti, 2013. "Investors' Horizons and the Amplification of Market Shocks," Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1607-1648.
    8. Albuquerque, Rui & Ramadorai, Tarun & Watugala, Sumudu, 2011. "Trade Credit and International Return Comovement," CEPR Discussion Papers 8222, C.E.P.R. Discussion Papers.
    9. Égert, Balázs & Kočenda, Evžen, 2014. "The impact of macro news and central bank communication on emerging European forex markets," Economic Systems, Elsevier, vol. 38(1), pages 73-88.
    10. Marlène Isoré, 2011. "International Propagation of Financial Shocks in a Search and Matching Environment," FIW Working Paper series 068, FIW.
    11. Ramadorai, Tarun, 2010. "Investor Interest and Hedge Fund Returns," CEPR Discussion Papers 8092, C.E.P.R. Discussion Papers.
    12. Dimitri Vayanos & Paul Woolley, 2011. "Fund Flows and Asset Prices: A Baseline Model," FMG Discussion Papers dp667, Financial Markets Group.
    13. Mr. R. G Gelos, 2011. "International Mutual Funds, Capital Flow Volatility, and Contagion – A Survey," IMF Working Papers 2011/092, International Monetary Fund.
    14. Söhnke M. Bartram & John M. Griffin & Tae-Hoon Lim & David T. Ng, 2015. "How Important Are Foreign Ownership Linkages for International Stock Returns?," Review of Financial Studies, Society for Financial Studies, vol. 28(11), pages 3036-3072.
    15. Ozgur Ozel & Mustafa Utku Ozmen & Erdal Yilmaz, 2015. "Importance of Foreign Ownership and Staggered Adjustment of Capital Outflows," Working Papers 1531, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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    More about this item

    Keywords

    co-movement; contagion; hedge funds; international finance; mutual funds;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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