contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

default risk and risk averse international investors abstract this paper develops an endogenous default risk model for small open economies that interact with risk averse international investors whose preferences exhibit decreasing absolute risk aversion dara by incorporating risk averse investors who trade with an emerging economy the present model explains a larger proportion and volatility of the spread between sovereign bonds and riskless assets than the standard model with risk neutral investors the paper shows that if investors have dara preferences then the emerging economy s default risk capital flows and bond prices are a function not only of the fundamentals of the economy but also of the level of financial wealth and risk aversion of international investors in particular as investors become wealthier or less risk averse the emerging economy becomes less credit constrained as a result the emerging economy s default risk is lower and its bond prices and capital inflows are higher additionally with risk averse investors the risk premium in the asset prices of the sovereign countries can be decomposed into two components a base premium that compensates the investors for the probability of default and an excess premium that compensates them for taking the risk of default

on cross border bank credit and the u s financial crisis transmission to equity markets this paper examines the role played by cross border equity bond and bank credit flows versus international trade in the transmission of the u s financial crisis to equity markets worldwide we estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries the results from an eclectic methodology that includes causality tests generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade the results are robust to altering the exogenous versus endogenous vectors of variables to measuring equity prices in u s dollars or local currency to averaging the data across countries versus averaging the parameters from individual country estimation and to redefining the start date of the crisis the findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability

spillovers through banking centers a panel data analysis of bank flows abstract this paper presents evidence that spillovers through bank lending contributed to the transmission of currency crises during the recent episodes of financial instability in emerging markets the innovation of the paper is that it looks beyond aggregated measures of contagion into the structure of bank flows disaggregating by banking centers the main findings are that spillovers caused by banks exposures to a crisis country help predict flows in third countries after the mexican and asian crises but not after the russian crisis in the latter there is evidence of a generalized outflow from emerging markets the importance of spillovers through banking centers suggests that countries might reduce contagion risk by diversifying the sources of their financing and by carefully monitoring borrowing from creditors exposed to potential crisis countries

sulfur dioxide control by electric utilities what are the gains from trade title iv of the 1990 clean air act amendments caaa established a market for transferable sulfur dioxide so2 emission allowances among electric utilities this market offers firms facing high marginal abatement costs the opportunity to purchase the right to emit so2 from firms with lower costs and this is expected to yield cost savings compared to a command and control approach to environmental regulation this paper uses econometrically estimated marginal abatement cost functions for power plants affected by title iv of the caaa to evaluate the performance of the so2 allowance market specifically we investigate whether the much heralded fall in the cost of abating so2 compared to original estimates can be attributed to allowance trading we demonstrate that for plants that use low sulfur coal to reduce so2 emissions technical change and the fall in prices of low sulfur coal have lowered marginal abatement cost curves by over 50 percent since 1985 the flexibility to take advantage of these chan

contagion of self fulfilling financial crises due to diversification of investment portfolios abstract we look at two countries that have independent fundamentals but share the same group of investors each country might face a self fulfilling crisis agents withdrawing their investments fearing that others will a crisis in one country reduces agents wealth this makes them more averse to the strategic risk associated with the unknown behavior of other agents in the second country increasing their incentive to withdraw their investments consequently the probability of a crisis there increases this generates a positive correlation between the returns in the two countries since diversification affects returns in our model its welfare implications are non trivial

trade credit and cross country predictable firm returns we investigate the role of trade credit links in generating cross border return predictability between international firms using data from 42 countries from 1993 to 2009 we find that firms with high trade credit located in producer countries have stock returns that are strongly predictable by the returns of their associated customer countries this behavior is especially prevalent for firms with high levels of foreign sales and is robust to a variety of controls to better understand this effect we develop an asset pricing model in which firms in different countries are connected by trade credit links the model has further predictions about this phenomenon including stronger predictability during periods of high credit constraints and high uninformed trading volume we find supportive empirical evidence for these results

stabilizing non fundamental asset price movements under discretion and limited information abstract inflation output and interest rate stabilization are all potential central bank objectives we explore whether monetary policy should respond to asset price fluctuations when they are driven by irrational expectational shocks to the future returns to capital in our model an optimistic shock to future returns generates both an increase in equity prices and physical investment the increased investment is inefficient and thus a central bank optimally responds to this expectations shocks this induces a trade off between stabilizing nominal prices and non fundamental asset price movements we compare the optimal policy under different assumptions full versus limited information and commitment versus discretion if the central bank has limited information about whether an asset price movement has a fundamental or non fundamental origin then the central bank responds less aggressively to the non fundamental exuberance shocks than under full information without commitment a central bank responds more aggressively to non fundamental exuberance shocks

how are derivatives used evidence from the mutual fund industry we investigate investment managers use of derivatives by comparing return distributions for equity mutual funds that use and do not use derivatives in contrast to public perception derivative users have risk exposure and return performance that are similar to nonusers we also analyze changes in fund risk in response to prior fund performance changes in risk are substantially less severe for funds using derivatives consistent with the explanation that managers use derivatives to reduce the impact of performance on risk we provide new evidence regarding the implications of cash flows and managerial gaming for the relation between performance and risk

asymmetric price movements and borrowing constraints a rational expectations equilibrium model of crises contagion and confusion this study proposes a rational expectations equilibrium model of crises and contagion in an economy with information asymmetry and borrowing constraints consistent with empirical observations the model finds 1 crises can be caused by small shocks to fundamentals 2 market return distributions are asymmetric and 3 correlations among asset returns tend to increase during crashes the model also predicts 1 crises and contagion are likely to occur after small shocks in the intermediate price region 2 the skewness of asset price distributions increases with information asymmetry and borrowing constraints and 3 crises can spread through investor borrowing constraints

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

the directional volatility connectedness between crude oil and equity markets new evidence from implied volatility indexes in this paper we use a set of newly introduced implied volatility indexes to investigate the directional connectedness between oil and equities in eleven major stock exchanges around the globe from 2008 to 2015 the inference on the oil equity implied volatility relationships depends on diebold and yilmaz 2012 2014 2015 who proposed a set of directional measures that enable the dynamic and directional characterization of the relationships among financial variables we find uniform results across the sample countries indicating that the connectedness between oil and equity is established by the bi directional information spillovers between the two markets however we find that the bulk of association is largely dominated by the transmissions from the oil market to equity markets and not the other way around the pattern of transmissions is varying over the sample period however most of the linkages between oil and equities are established from the mid of 2009 to the mid of 2012 which is a period that witnessed the start of global recovery

mutual funds flows and the geography of contagion abstract this paper studies the dynamics and geography of investments made by international mutual funds located in advanced markets i identify precise global and regional dynamics in equity and bond flows very few countries receive or lose funding in isolation i also find strong evidence of global contagion when financial conditions in developed markets change emerging markets funding is heavily affected i illustrate this finding by deriving contagion maps showing where contagion spreads and with what intensity in general the results suggest that push effects from advanced market investors affect massively developing countries and expose them to sudden stops and surges

on crises contagion and confusion abstract since the tequila crisis of 1994 1995 the asian flu of 1997 and the russian virus of 1998 economists have been busy producing research on the subject of contagion yet few studies have examined empirically through which channels the disturbances are transmitted if there are indeed fundamental reasons for the spillovers we observe we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals based contagion we examine the role of international bank lending the potential for cross market hedging and bilateral and third party trade in the propagation of crises

does institutional ownership matter for international stock return comovement funding portuguese foundation for science and technology fct uid ges 00407 2013 ptdc iim fin 2977 2014 and european research council

intrinsic bubbles and regime switching abstract froot and obstfeld 1991 allow for an intrinsic bubble in stock prices using approximately a century of annual data for the us in an attempt to model the widely documented deviations from the prices predicted by present values or fundamentals however they assume that the log of real dividends follows a constant random walk with drift over the whole period we show that this assumption is invalid and that a markov switching model is a more appropriate representation of dividends we then generalise the formulation of stock prices including the intrinsic bubble to allow for this and show that regime switching provides a better explanation for stock prices than the bubble we show that when allowance is made both for the bubble and for regime switching in the dividend process the incremental explanatory contribution of the bubble is low

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners an empirical investigation of the performance of 334 growth oriented mutual funds during 1976 to 1991 demonstrates that mid year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid year winners furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

granular institutional investors and global market interdependence 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

relative risk aversion and the transmission of financial crises we study how investor behavior affects the transmission of financial crises if investors exhibit decreasing relative risk aversion then negative wealth shocks increase the risk premium required to hold risky assets we integrate this into a second generation model of currency crises which allows for contagion through changes in fundamentals investor behavior can be a transmission channel of financial crises as changes in risk premia increase the coverage ratio and makes the defense of a peg less attractive for the policy maker the feedback effect of the risk premia on the probability of devaluation also makes multiple equilibria more likely the possible stabilization effects of capital controls and a tobin tax on the international transmission of financial crises are also studied

managers investors and crises mutual fund strategies in emerging markets the authors address the trading strategies of mutual funds in emerging markets the data set they develop permits analyses of these strategies at the level of individual portfolios a methodologically novel feature of their analysis they disentangle the behavior of fund managers from that of investors for both managers and investors they strongly reject the null hypothesis of no momentum trading funds momentum trading is positive they systematically buy winners and sell losers contemporaneous momentum trading buying current winners and selling current losers is stronger during crises and stronger for fund investors than for fund managers lagged momentum trading buying past winners and selling past losers is stronger during noncrises and stronger for fund managers investors also engage in contagion trading selling assets from one country when asset prices fall in another these findings are based on data about mutual funds that represent only 10 percent of the market capitalization in the countries considered were it a larger share of the market finding counterparties for their trades the investors who buy when they sell and sell when they buy would be difficult and the premise that funds respond to contemporaneous returns rather than causing them would become tenuous

push factors and capital flows to emerging markets why knowing your lender matters more than fundamentals abstract countries gross capital inflows are not equally affected by changes in global conditions analyzing 21 advanced countries acs and 33 emerging markets ems between 2001 and 2015 we confirm that co movements in capital inflows are concentrated in bank portfolio bond and portfolio equity flows to ems however changes in global factors do not affect all ems equally even for the same type of flow investigating the characteristics of these sensitivities we find that ems relying more on global mutual funds are more sensitive in their gross equity and bond inflows recipient market liquidity and inclusion in global market indices also increase sensitivities but we find little robust evidence that institutional and macroeconomic fundamentals dampen sensitivities

global banking global crises the role of the bank balance sheet channel for the transmission of financial crises abstract we examine whether shocks to leveraged creditors with cross border holdings have an incidence on debtor countries risk of suffering financial turmoil we construct a new proxy of shocks to international banks balance sheets using credit ratings and the structure of their international assets this allows us investigating the effect of foreign bank balance sheet shocks on domestic financial turmoil in a large sample of 146 developed and emerging economies from 1984 to 2011 our proxies of shocks towards bank balance sheets are strong predictors of systemic banking crises in their debtor countries confirming these results bilateral bank flows significantly decrease when creditor banks assets are hit by negative shocks as measured by credit rating downgrades from third party countries short term liabilities towards global banks appear to increase roll over and funding risks thereby amplifying the impact of shocks to foreign lenders balance sheets domestic banking sectors vulnerabilities such as illiquid assets and a low deposit asset ratio are found to increase crisis contagion risk in contrast a high level of global liquidity attenuates the transmission of shocks to international banks assets to debtor countries

institutional investors and long term investment evidence from chile developing countries are trying to develop long term financial markets and institutional investors are expected to play a key role this paper uses unique evidence on the universe of institutional investors from the leading case of chile to study to what extent mutual funds pension funds and insurance companies hold and bid for long term instruments and which factors affect their choices the paper uses monthly asset level portfolios to show that despite the expectations mutual and pension funds invest mostly in short term assets relative to insurance companies the significant difference across maturity structures is not driven by the supply side of debt or tactical behavior instead it seems to be explained by manager incentives related to short run monitoring and the liability structure that combined with risk factors tilt portfolios toward short term instruments even when long term investing yields higher returns thus the expansion of large institutional investors does not necessarily imply longer term markets

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as 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 implications for capital flows in emerging markets

international asset allocations and capital flows the benchmark effect this paper studies channels through which well known benchmark indexes impact asset allocations and capital flows across countries the study uses unique monthly micro level data of benchmark compositions and mutual fund investments during 1996 2012 benchmarks have important effects on equity and bond mutual fund portfolios across funds with different degrees of activism benchmarks explain on average around 70 percent of country allocations and have significant impact even on active funds benchmark effects are important after controlling for industry macroeconomic and country specific time varying effects reverse causality does not drive the results exogenous pre announced changes in benchmarks result in movements in asset allocations mostly when these changes are implemented not when announced by impacting country allocations benchmarks affect capital flows across countries through direct and indirect channels including contagion they explain apparently counterintuitive movements in capital flows generating outflows from countries when upgraded and with large market capitalization and better relative performance

the unholy trinity of financial contagion over the last 20 years some financial events such as devaluations or defaults have triggered an immediate adverse chain reaction in other countries which we call fast and furious contagion yet on other occasions similar events have failed to trigger any immediate international reaction we argue that fast and furious contagion episodes are characterized by the unholy trinity i they follow a large surge in capital flows ii they come as a surprise and iii they involve a leveraged common creditor in contrast when similar events have elicited little international reaction they were widely anticipated and took place at a time when capital flows had already subsided

when in peril retrench testing the portfolio channel of contagion abstract the impact of past gains and losses on international investors risk aversion is an important factor in the propagation of financial shocks across countries we first present a stylized model illustrating how changes in investors risk aversion affect portfolio decisions and stock prices we then examine empirically the behavior of international mutual funds when funds returns are below average they reduce their exposure to countries in which they were overweight and vice versa an index of financial interdependence that reflects the extent to which countries share overexposed funds helps explain the pattern of stock market comovement across countries and the pattern of contagion during crises

fdi debt and capital controls abstract we examine the link between financial sector fdi flows banking debt flows and capital controls in emerging market economies during episodes of large gross capital inflows surges we find that fdi surges in the financial sector behave remarkably similar to surges in banking debt flows they are associated with boom bust cycles in gdp and expansions of credit in foreign currency unlike surges in fdi in the non financial sectors moreover global and contagion factors have a strong explanatory power in explaining surges in financial fdi and banking debt flows compared to surges in non financial sectors but capital controls have the opposite effect on the two types of flows restrictions on short term debt flows tend to decrease the likelihood of surges in banking debt flows but increase the likelihood of surges in financial sector fdi

why do emerging economies borrow short term the authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long term debt they first present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders by issuing long term debt the government lowers the probability of a liquidity crisis transferring risk to bondholders in equilibrium this risk is reflected in a higher risk premium and borrowing cost therefore the government faces a tradeoff between safer long term borrowing and cheaper short term debt second the authors construct a new database of sovereign bond prices and issuance they show that emerging economies pay a positive term premium a higher risk premium on long term bonds than on short term bonds during crises the term premium increases with issuance shifting toward shorter maturities this suggests that changes in bondholders risk aversion are important to understand emerging market crises

how resilient and countercyclical were emerging economies to the global financial crisis during the crises of the 1990s emerging economies usually lacked the policy tools to deal with external shocks that were available to advanced economies worldwide turbulent episodes found most emerging economies unable to perform countercyclical policies and in many cases their own vulnerabilities and poor institutional frameworks amplified negative external shocks leading to sharper recessions this paper shows that the 2008 2009 global financial crisis represents a structural break in the way emerging economies conduct their policies with more countercyclical policies pursued before and during the global crisis moreover breaking with the past emerging economies did not fall more than developed economies during the global financial crisis thus becoming more similar to developed economies the resilience of emerging economies during the 2008 2009 crisis might be partly attributed to a combination of sounder macroeconomic and financial policy frameworks with a shift towards safer domestic and international financial stances

soft landing in a markov switching economy abstract we analyse the monetary policy implications of boom bust cycles in asset prices using a markov switching rational expectations model in our simulations when a bubble bursts the taylor rule fails to achieve a soft landing contrary to the optimal policy

bubble thy neighbor portfolio effects and externalities from capital controls we use changes in brazil s tax on capital inflows from 2006 to 2013 to test for direct portfolio effects and externalities from capital controls on investor portfolios we find that an increase in brazil s tax on foreign investment in bonds causes fund managers to significantly decrease their portfolio allocations to brazil in both bonds and equities fund managers simultaneously increase allocations to other countries that have substantial exposure to china and decrease allocations to countries viewed as more likely to adjust their capital controls much of the effect of capital controls on portfolio allocation appears to occur through signalling i e changes in investor expectations about future policies rather than the direct cost of the controls this evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries

contagion of a liquidity crisis between two firms abstract this paper presents a model in which the contagion of a liquidity crisis between two nonfinancial institutions occurs because of learning activity within a common creditor pool after creditors observe what occurs in a rollover game for a firm they conjecture one another s type or attitude toward the risk associated with the firm s investment project creditors inference about one another s type then influences their decision to lend to the next firm by providing an analysis of the incidence of failure the threshold for a liquidity crisis for each firm this paper demonstrates that the risk of contagion increases sharply if it originates ex ante from a firm facing a low probability of failure in addition the paper proposes some policy measures for mitigating the severity of contagion during a liquidity crisis

risk and wealth in a model of self fulfilling currency attacks market participants risk attitudes wealth and portfolio composition in uence their positions in a pegged foreign currency and therefore may have important efiects on the sustainability of currency pegs we analyze such efiects in a global game model of currency crises with continuous action choices generating a rich set of theoretical comparative static predictions related to often discussed but rarely modelled accounts of the onset and timing of currency crises the model can be solved in closed form and the methods could be used to study other economic issues in which coordination and risk aversion play important roles

same but different testing monetary policy shock measures abstract in this study we determine the reliability and exogeneity of four popular monetary policy shock measures namely the narrative series of romer and romer 2004 the high frequency series of barakchian and crowe 2013 the high frequency series of gertler and karadi 2015 and the hybrid series of miranda agrippino and ricco 2018b to this end we employ the proxy svar model and different empirical diagnostic tools to determine the shock measures information content we find that the measure of miranda agrippino and ricco 2018b combining the insights from the narrative approach and high frequency identification outperforms the other three series