TY  - JOUR
AU  - Pavlova,Anna
AU  - Rigobon,Roberto
TI  - Wealth Transfers, Contagion, and Portfolio Constraints
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11440
PY  - 2005
Y2  - June 2005
UR  - http://www.nber.org/papers/w11440
L1  - http://www.nber.org/papers/w11440.pdf
N1  - Author contact info:
Anna Pavlova
London Business School
Regents Park
London NW1 4SA
UK
Tel: 617/253-7159
E-Mail: apavlova@london.edu

Roberto Rigobon
MIT Sloan School of Management
100 Main Street, E62-516
Cambridge, MA 02142
Tel: 617/258-8374
Fax: 617/258-6855
E-Mail: rigobon@mit.edu
M2  - featured in NBER digest on 2005-06-27
AB  - This paper examines the co-movement among stock market prices and exchange rates within a three-country Center-Periphery dynamic equilibrium model in which agents in the Center country face portfolio constraints. In our model, international transmission occurs through the terms of trade, through the common discount factor for cash flows, and, finally, through an additional channel reflecting the tightness of the portfolio constraints. Portfolio constraints are shown to
generate endogenous wealth transfers to or from the Periphery countries. These implicit transfers are responsible for creating contagion among the terms of trade of the Periphery countries, as well as their stock market prices. Under a portfolio constraint limiting investment of the Center country in the stock markets of the Periphery, stock prices also exhibit a flight to quality: a negative shock to one of the Periphery countries depresses stock prices throughout the Periphery,
while boosting the stock market in the Center.
ER  -