When in peril, retrench
Subtitle: testing the portfolio channel of contagion
By: Fernando A. Broner, R. Gaston Gelos, Carmen Reinhart.
Contributors: Gelos, Gaston.; Reinhart, Carmen M.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10941; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10941.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "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"--National Bureau of Economic Research web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 1/12/2005.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.