International Mutual Funds, Capital Flow Volatility, and Contagion

International Mutual Funds, Capital Flow Volatility, and Contagion – A Survey

April 1, 2011

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Format: Chicago

Gaston Gelos. International Mutual Funds, Capital Flow Volatility, and Contagion – A Survey, (USA: International Monetary Fund, 2011) accessed December 4, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Gaining a better understanding of the behavior of international investors is key for informing the debate about the optimal response to capital flows and about reforms to the international financial architecture. In this context, recent research on the behavior of international mutual funds at the micro level has expanded our knowledge about the drivers of portfolio flows and the mechanisms behind the transmission of financial shocks across countries. This paper provides a brief survey of this literature, with a focus on the empirical evidence for emerging markets. Overall, the behavior of international mutual funds is complex and overly simplistic characterizations are misleading. However, there is broad-based evidence for momentum trading among funds. Moreover, funds tend to avoid opaque markets and assets, and this behavior becomes more pronounced during volatile times. Portfolio rebalancing mechanisms are clearly important in explaining contagion patterns, even in the absence of common macroeconomic fundamentals. From a surveillance point of view, this implies that monitoring the exposures of large investors at a micro level is crucial to assess vulnerabilities.

Subject: Emerging and frontier financial markets, Mutual funds, Securities markets, Stock markets, Stocks

Keywords: Emerging market, Equity fund, Fund, Mutual fund, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/092
Stock No:

WPIEA2011092
ISBN:

9781455253319
ISSN:

1018-5941

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