On the International Transmission of Shocks:
Micro-Evidence from Mutual Fund Portfolios
Claudio Raddatz and Sergio Schmukler
Discussion by Neeltje van Horen
Debt and Credit, Growth and Crises
18-19 June 2012, Banco de Espana Madrid
Aim of paper
Main question:
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How do mutual fund investors and managers behave?
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Do they transmit shocks across countries?
Main findings
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Based on fund-level data from 1,261 int’l equity and bond funds
domiciled in 28 countries and investing in 124 countries
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Volatility of mutual fund investment in a country driven by:
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Injections/redemptions (investors)
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Changes in country weights (managers)
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Fund return (+)
Country of origin return (+)
Global financial crisis (-)
Relative return (+)
Country in crisis (-)
Changes in cash (managers)
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Fund return (-)
Country in crisis/global crisis (+)
Main findings
Conclusion:
Capital flows from mutual funds are pro-cyclical and
transmit shocks across countries
Overall assessment
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Very timely and interesting topic with important policy
implications
Important extension to the literature: very little research on
how international investors behave (during crises)
Very nice dataset and interesting findings
Overall: great paper → forthcoming JIE
What about the discussion?
Ideas for future research
Unique micro-level data
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Assets large number of mutual funds
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Country weights in portfolios (managers choice)
1996-Nov 2010 (monthly)
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Can extract injections/redemptions (investor choice)
Crises in general (Asia, Russia, Brazil)
Global financial crisis in particular
Many funds investing in same countries/region
Level of disaggregation allows for neat identification
Recent findings cross-border banking literature
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Bank funding shocks had significant negative impact on
cross-border bank lending in global financial crisis
Cetorelli & Goldberg (2011); Paravisini, Rappoport, Schnabl &
Wolfenzon (2012); De Haas & Van Horen (2012);
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During crises banks tend to increase proportion of domestic
lending
Gianetti & Laeven (2011)
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There is no generalized run for the exit. Banks reallocate
cross-border portfolios towards “close” countries
De Haas & Van Horen (2011)
Findings on int’l MF flows and crises
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Investors withdraw from int’l MF during market downturns/
crises
Kaminsky, Lyons & Schmukler (2001); Raddatz & Schukler (2012)
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Movements in investor flows force reallocations in EM funds
Jotikasthira, Lundblad & Ramdorai (2012)
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MF investors show herding behavior but not differently
during crisis
Borensztein & Gelos (2003)
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International MF act as a transmission channel during crises
because of relative performance concerns
Broner, Gelos & Reinhart (2006)
Possible future research
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Increase in home bias during crises?
How are international portfolios reallocated during
crises?
Increase in home bias?
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Evidence of strong home bias in MF investments
Chan, Covrig & Ng (2005), Hau & Rey (2008)
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Does this change during a crisis?
In banking yes. Arguments:
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Domestic loans more likely bailed out/ support can come with
strings attached
Harder to meet capital requirements, so tendency to reduce
riskier (= foreign) assets
Monitoring and screening foreign loans more difficult
But what about MF investments?
Increase in home bias?
Different arguments can be made:
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Diversification benefits higher during times or stress
Factors driving equity home bias in normal times (Chan,
Covrig & Ng, 2005) might become stronger during crisis
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Familiarity
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High information cost stronger impediment when risk of default
is larger
Stock market development
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Ability to quickly liquidate without large price effects and low
transactions costs matters more when markets are volatile
Increase in home bias?
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Ultimately is empirical question which can be answered with
these data when adding domestic MF to the dataset
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Relative withdrawal investors from international compared to
domestic MF
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Since MF domiciled in various countries can control for flight to
quality effect
Reallocation managers in global funds towards domestic
market
How are portfolios reallocated?
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Managers actively adjust country weights over time (incl. in
reaction to crises)
Broner, Gelos, Reinhart (2006); Raddatz & Schmukler (2012);
Jotikasthira, Lundblad & Ramadorai (2012)
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Therefore MF play role in propagation of shocks across
borders
Important to understand as impact on stability of capital
flows.
Scope for further research
How are portfolios reallocated?
Revisit herding question (Borenzstein & Gelos, 2003):
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BG construct measure of herding based on observed changes
in flows in/out of country by MFs
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Herding same in tranquil and crisis times
But cannot/do not differentiate between herding among
investors and managers
Interesting to isolate the two
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Investor decisions force reallocations of portfolios
(Jotikasthira, Lundblad & Ramadorai, 2012)
How are portfolios reallocated?
With these data this is possible
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Do investors herd? Do managers herd? To what extent do
they reinforce each other? Tranquil vs crisis times?
Especially of interest (to me) is behavior of managers given a
funding shock (global crisis)
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Banks: no evidence herding behavior
MF manager: ?
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Relative performance matters  incentive follow herd
Yes/no herding, which countries?
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More liquid markets (Jotikasthira, Lundblad & Ramadorai,
2012)
But what else?
Data with lot of potential
Jumping through some hoops (data collection) and
with some creativity a lot can be accomplished!
Iniesta – EURO 2012
THANK YOU