When in Peril, Retrench: Testing the Portfolio Channel of Contagion / Fernando A. Broner, R. Gaston Gelos, Carmen Reinhart.

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Broner, Fernando A

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w10941.Publication details: Cambridge, Mass. National Bureau of Economic Research 2004.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: 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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w10941 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w10939 FDI in Space: Spatial Autoregressive Relationships in Foreign Direct Investment /	nber w1094 Some Aspects of the Taxation of Capital Gains /	nber w10940 Quantitative Implication of A Debt-Deflation Theory of Sudden Stops and Asset Prices /	nber w10941 When in Peril, Retrench: Testing the Portfolio Channel of Contagion /	nber w10942 Financial Globalization, Growth and Volatility in Developing Countries /	nber w10943 Information and Externalities in Sequential Litigation /	nber w10944 How to Eliminate Pyramidal Business Groups - The Double Taxation of Inter-Corporate Dividends and Other Incisive Uses of Tax Policy /	Next

December 2004.

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.