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Market-Based Solutions to Vital Economic Issues
Research
Dec 1, 2012

Asset Fire Sales and Purchases and the International Transmission of Financial Shocks

Abstract

We identify a new channel for the transmission of shocks across international markets. Investor flows to funds domiciled in developed markets force significant changes in these funds’ emerging market portfolio allocations. These forced trades or “fire sales” affect emerging market equity prices, correlations, and betas, and are related to but distinct from effects arising purely from fund holdings or from overlapping ownership of emerging markets in fund portfolios. A simple model and calibration exercise highlight the importance to these findings of “push” effects from funds’ domicile countries and “co-ownership spillover” between markets with overlapping fund ownership.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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