Investment Restrictions and Contagion in Emerging Markets

Author/Editor:

Anna Ilyina

Publication Date:

September 1, 2005

Electronic Access:

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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:

The objectives of this paper are: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a "volatility shock" in one of the asset markets, under sufficiently realistic assumptions about the fund manager's performance criteria and investment restrictions; and (2) to analyze the sensitivity of the equilibrium price of an asset to shocks originating in other fundamentally unrelated asset markets for a given mix of common investors. The analysis confirms that certain combinations of investment restrictions (notably short-sale constraints and benchmark-based performance criteria) can create additional transmission mechanisms for propagating shocks across fundamentally unrelated asset markets. The paper also discusses potential implications of recent and on-going changes in the investor base for emerging market securities for the asset price volatility.

Series:

Working Paper No. 2005/190

Subject:

Asset and liability management Asset prices Asset valuation Econometric analysis Emerging and frontier financial markets Financial markets Prices Securities markets Vector autoregression

English

Publication Date:

September 1, 2005

ISBN/ISSN:

9781451862096/1018-5941

Stock No:

WPIEA2005190

Pages:

34

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