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Investor behaviour and contagion

Todd Feldman

Quantitative Finance, 2014, vol. 14, issue 4, 725-735

Abstract: This paper examines two open questions in international finance. First, what is the relative importance of different linkages in causing global financial crises? The second question concerns whether or not investor behaviour affects contagion. I use a two-market agent-based model that incorporates insights from behavioural finance to answer these open questions. Simulated managers only affect contagion when they control a small proportion of the total assets in each market. This evidence may partly explain the Russian contagion to Brazil where direct linkages did not exist. In addition, results show that global managers must make up between 40 and 50% of both local markets in order to become a more important linkage than that of international trade.

Date: 2014
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