Regional Contagion and the Globalization of Securities Markets

Guillermo Calvo and Enrique Mendoza

No 7153, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper argues that the globalization of securities markets may promote contagion among investors by weakening incentives for gathering costly country-specific information and by strengthening incentives for imitating arbitrary market portfolios. In the presence of short-selling constraints, the utility gain of gathering information at a fixed cost converges to a constant level and may diminish as securities markets grow. Moreover, if a portfolio manager's marginal cost for yielding below-market returns exceeds the marginal gain for above-market returns, there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows. Numerical simulations suggest that these frictions can have significant quantitative implications and they may induce large capital flows in emerging markets.

JEL-codes: F30 F34 (search for similar items in EconPapers)
Date: 1999-06
New Economics Papers: this item is included in nep-dge, nep-fin and nep-pke
Note: ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Published as Journal of International Economics, Vol. 51 (June 2000): 79-114.

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Journal Article: Rational contagion and the globalization of securities markets (2000)
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