TY  - JOUR
AU  - Calvo,Guillermo A.
AU  - Mendoza,Enrique G.
TI  - Regional Contagion and the Globalization of Securities Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7153
PY  - 1999
Y2  - June 1999
UR  - http://www.nber.org/papers/w7153
L1  - http://www.nber.org/papers/w7153.pdf
N1  - Author contact info:
Guillermo A. Calvo
Columbia University
School of International and Public Affairs
420 West 118th St, Room 1303B
MC3332
New York, NY 10027
Tel: 212/854-4264
E-Mail: gc2286@columbia.edu

Enrique G. Mendoza
Department of Economics
University of Maryland
College Park, MD 20742
Tel: 301/405-3845
Fax: 301/405-7835
E-Mail: mendozae@econ.umd.edu
AB  - This paper argues that the globalization of securities markets may promote contagion among investors by weakening incentives for gathering costly country-specific information and by strengthening incentives for imitating arbitrary market portfolios.  In the presence of short-selling constraints, the utility gain of gathering information at a fixed cost converges to a constant level and may diminish as securities markets grow.  Moreover, if a portfolio manager's marginal cost for yielding below-market returns exceeds the marginal gain for above-market returns, there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows.  Numerical simulations suggest that these frictions can have significant quantitative implications and they may induce large capital flows in emerging markets.
ER  -