Financial panic and emerging market funds

Yothin Jinjarak and Huanhuan Zheng

Applied Financial Economics, 2010, vol. 20, issue 23, 1793-1805

Abstract: This article studies equity investment of emerging-market funds based on the 2003-2009 weekly data and compares the dynamics of flow and return between tranquil period and financial panic based on the experience of the latest 2008-2009 global financial crisis. First, we find that the well-documented positive feedback trading is a tranquil-period phenomenon such that it is more difficult in general for emerging-market funds to attract new investment in financial panic. Second, the predictive power of flow on return is driven by a combination of price pressure and information effects in tranquil period, while the information effect dominates in financial panic. Third, the underlying co-movements or contagion of flow across the emerging-market funds influence the association between flow and return. Overall, the findings highlight the importance of accounting for state-dependent dynamics as well as cross-regional co-movements in the analysis of flow and return.

Date: 2010
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DOI: 10.1080/09603107.2010.526572

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