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Granular institutional investors and global market interdependence

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  • Jinjarak, Yothin
  • Zheng, Huanhuan

Abstract

We study the propagation of global investment risk across markets through the granular view of institutional investors. Applying the conditional value-at-risk estimation to micro-level weekly observations of international mutual funds between 2003 and 2011, we find that idiosyncratic shocks to large institutional investors explain both aggregate market risk and cross-market risk interdependence. Conditional on the US capital markets being in financial distress, idiosyncratic shocks to the top 10% largest funds investing in the US explain about 40% of the risk fluctuations in other non-US markets. The findings are also economically and statistically significant for the top largest funds investing in non-US markets, with the effects becoming especially large during the global financial crisis of 2007–09. These results are robust after controlling for common risk factors and applying alternative measures of idiosyncratic shocks.

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  • Jinjarak, Yothin & Zheng, Huanhuan, 2014. "Granular institutional investors and global market interdependence," Journal of International Money and Finance, Elsevier, vol. 46(C), pages 61-81.
    • Handle: RePEc:eee:jimfin:v:46:y:2014:i:c:p:61-81
    DOI: 10.1016/j.jimonfin.2014.03.007
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    More about this item

    Keywords

    Systemic risk; Risk propagation; Market interdependence; Financial crisis;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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