A Panic-Prone Pack? The Behavior of Emerging Market Mutual Funds

This article explores the behavior of emerging market mutual funds using a novel database covering the holdings of individual funds over the period January 1996 to December 2000. The degree of herding among funds is statistically significant, but moderate. Herding is more widespread among open-ended funds than among closed-end funds, but not more prevalent during crises than during tranquil times. We find some evidence that funds tend to follow momentum strategies, selling past losers and buying past winners. Copyright 2003, International Monetary Fund

Transparency and International Investor Behavior

Does country transparency affect international portfolio investment? We examine this and related questions using some new measures of transparency and a unique micro dataset on international portfolio holdings. We distinguish between government and corporate transparency. There is clear evidence that international funds invest systematically less in less transparent countries. On the other hand, herding among funds tends to be more prevalent in less transparent countries. There is also some evidence that during crises, funds flee non-transparent countries by a greater amount.

When in Peril, Retrench: Testing the Portfolio Channel of Contagion

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.

Fixed Capital Adjustment: Is Latin America Different?

We examine capital adjustment patterns using two large and largely novel plant-level data sets from the manufacturing sectors of Colombia and Mexico. The data suggest that irreversibilities play a more important role than in more-advanced economies. However, we do not find support for the presence of increasing returns in the adjustment cost technology, such as arising from fixed costs. Firms go through periods of inaction and rarely sell capital, but they do not invest at discrete times only. An examination of the dynamic patterns of adjustment of factors differing in their flexibility supports this interpretation. © 2001 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology