TY  - JOUR
AU  - Broner,Fernando A.
AU  - Gelos,R. Gaston
AU  - Reinhart,Carmen
TI  - When in Peril, Retrench: Testing the Portfolio Channel of Contagion
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10941
PY  - 2004
Y2  - December 2004
UR  - http://www.nber.org/papers/w10941
L1  - http://www.nber.org/papers/w10941.pdf
N1  - Author contact info:
Fernando Broner
CREI and Universitat Pompeu Fabra
Ramon Trias Fargas, 25-27
08005 Barcelona
Spain
Tel: +34-935422601
Fax: +34-935421860
E-Mail: fbroner@crei.cat

Gaston Gelos
Research Dept.
International Monetary Fund
700 19th St., NW
Washington, DC 20431
E-Mail: ggelos@imf.org

Carmen M. Reinhart
Peterson Institute for International Economics
1750 Massachusetts Avenue, NW
Washington, DC 20036-1903
Tel: 202-454-1325
Fax: 202-659-3225
E-Mail: creinhart@piie.com
AB  - 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.
ER  -