When in Peril, Retrench: Testing the Portfolio Channel of Contagion

By Fernando A. Broner, R. G. Gelos, Carmen M. Reinhart. Social Science Research Network, 2004

222 citations recorded by the source corpus.

One plausible mechanism through which financial market shocks may propagate across countries is through the effect of past gains and losses on investors' risk aversion. The paper first presents a simple model examining how heterogeneous changes in investors' risk aversion affects portfolio decisions and stock prices. Second, the paper shows empirically that, when funds' returns are below average, they adjust their holdings toward the average (or benchmark) portfolio. In other words, they tend to sell the assets of countries in which they were "overweight", increasing their exposure to countries in which they were "underweight." Based on this insight, the paper discusses a matrix of financial interdependence reflecting the extent to which countries share overexposed funds. Comparing this measure to indices of trade or bank linkages indicates that our index can improve predictions about which countries are likely to be affected by contagion from crisis centers.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/b2dae79ccf52ba8a010cc4aebf41ef675575b118

Citations in the corpus

• On the International Transmission of Shocks : Micro-Evidence from Mutual Fund Portfolios (2012, unknown): “The dataset has actively and passively managed funds with different investment scopes: global, 9 See, for example, Broner et al. (2006), Gourinchas and Rey (2007a), Hau and Rey (2008), Krugman (2008), Devereux and Yetman (2010), and Gourinchas et al. (2010).”
• How Resilient and Countercyclical Were Emerging Economies to the Global Financial Crisis? (2012, unknown): “See also Kaminsky and Reinhart (2000) and Martinez Peria et al. (2005) on the role of banks; Borensztein and Gelos (2003), Kaminsky et al. (2004b), Broner et al. (2006), and Raddatz and Schmukler (2012) on the role of mutual funds, among many others.”
• Speculators, Commodities and Cross-Market Linkages (2014, unknown): “…propagate internationally through financial channels such as bank lending (e.g., van Rijckeghem and Weder, 2001) and international mutual funds (e.g., Broner et al, 2006) or whether, instead, shocks spill over through real economy linkages such as trade relationships (e.g., Forbes and Chinn, 2004).”
• Default risk and risk averse international investors (2013, unknown): “See, for example, Kaminsky and Reinhart (1998), Kaminsky and Reinhart (2000), Van Rijckeghem and Weder (2001), Kaminsky et al.(2001), Hernández and Valdes (2001), Broner et al.(2006) and Hau and Rey (2008).”
• The directional volatility connectedness between crude oil and equity markets: New evidence from implied volatility indexes (2016, unknown): “see Kyle and Xiong (2001), Kodres and Pritsker (2002), Broner et al. (2006), Pavlova and Rigobon (2008), Danielsson et al.”
• The Transmission of Financial Stress from Advanced to Emerging Economies (2009, unknown): “…factors can be global shocks (e.g., global shifts in market sentiment or risk aversion) and may manifest themselves through herd behavior in markets, cross-country contagion, and common-lender effects via blanket withdrawal of funds by highly exposed financial institutions (Broner et al. 2006).”
• Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls (2012, unknown): “26 Also see Broner et al. (2006), Hau and Rey (2008), Curcuru et al. (2011), and Raddatz and Schmukler (2012), for the importance of benchmarks in international portfolio allocations.”
• Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro- and Financial Policies (2010, unknown): “See for example Calvo (1999), Broner et al (2006), and Didier et al (2008).”
• No contagion, only globalization and flight to quality (2012, unknown): “Some authors claim that contagion is driven by fundamentals (Erdorf and Heinrichs, 2011; Kodres and Pritsker, 2002), while others view contagion as created by over-reactions (Broner et al., 2006; Goldstein and Pauzner, 2004).”