When in peril, retrench: testing the portfolio channel of contagion
Fernando Broner,
R. Gaston Gelos () and
Carmen Reinhart
No 2004-28, Working Paper Series from Federal Reserve Bank of San Francisco
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.
Keywords: Risk; Investments (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)
Downloads: (external link)
http://www.frbsf.org/economic-research/files/wp04-28bk.pdf (application/pdf)
Related works:
Working Paper: When in Peril, Retrench: Testing the Portfolio Channel of Contagion (2015) 
Journal Article: When in peril, retrench: Testing the portfolio channel of contagion (2006) 
Working Paper: When in peril, retrench: Testing the portfolio channel of contagion (2005) 
Journal Article: When in peril, retrench: testing the portfolio channel of contagion (2004) 
Working Paper: When in Peril, Retrench: Testing the Portfolio Channel of Contagion (2004) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2004-28
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().