Investment Restrictions and Contagion in Emerging Markets

Anna Ilyina

No 2005/190, IMF Working Papers from International Monetary Fund

Abstract: The objectives of this paper are: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a "volatility shock" in one of the asset markets, under sufficiently realistic assumptions about the fund manager's performance criteria and investment restrictions; and (2) to analyze the sensitivity of the equilibrium price of an asset to shocks originating in other fundamentally unrelated asset markets for a given mix of common investors. The analysis confirms that certain combinations of investment restrictions (notably short-sale constraints and benchmark-based performance criteria) can create additional transmission mechanisms for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and on-going changes in the investor base for emerging market securities for the asset price volatility.

Keywords: WP; optimal portfolio; Investment restrictions; Contagion; Emerging markets; fund manager; optimization problem; EM assets; EM asset class; investment mandate; asset fundamentals; asset supplies; asset price dynamics; benchmark portfolio return; opportunistic investor; equilibrium asset price; EM investor; Emerging and frontier financial markets; Securities markets; Asset prices; Asset valuation; Vector autoregression; Global (search for similar items in EconPapers)
Pages: 34
Date: 2005-09-01
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Citations: View citations in EconPapers (1)

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