Debt and Credit, Growth and Crises 18-19 June 2012, Banco de Espana Madrid

1. On the International Transmission of Shocks: Micro-Evidence from Mutual Fund Portfolios Claudio Raddatz and Sergio SchmuklerDiscussion by Neeltje van Horen Debt and Credit, Growth and Crises 18-19 June 2012, Banco de Espana Madrid

2. Aim of paper Main question: • How do mutual fund investors and managers behave? • Do they transmit shocks across countries?

3. Main findings • Based on fund-level data from 1,261 int’l equity and bond funds domiciled in 28 countries and investing in 124 countries • Volatility of mutual fund investment in a country driven by: • Injections/redemptions (investors) • Fund return (+) • Country of origin return (+) • Global financial crisis (-) • Changes in country weights (managers) • Relative return (+) • Country in crisis (-) • Changes in cash (managers) • Fund return (-) • Country in crisis/global crisis (+)

4. Main findings Conclusion: Capital flows from mutual funds are pro-cyclical and transmit shocks across countries

5. Overall assessment • Very timely and interesting topic with important policy implications • Important extension to the literature: very little research on how international investors behave (during crises) • Very nice dataset and interesting findings • Overall: great paper → forthcoming JIE

6. What about the discussion?

7. Ideas for future research

10. Unique micro-level data • Assets large number of mutual funds • Can extract injections/redemptions (investor choice) • Country weights in portfolios (managers choice) • 1996-Nov 2010 (monthly) • Crises in general (Asia, Russia, Brazil) • Global financial crisis in particular • Many funds investing in same countries/region Level of disaggregation allows for neat identification

13. Recent findings cross-border banking literature • Bank funding shocks had significant negative impact on cross-border bank lending in global financial crisisCetorelli & Goldberg (2011); Paravisini, Rappoport, Schnabl & Wolfenzon (2012); De Haas & Van Horen (2012); • During crises banks tend to increase proportion of domestic lendingGianetti & Laeven (2011) • There is no generalized run for the exit. Banks reallocate cross-border portfolios towards “close” countriesDe Haas & Van Horen (2011)

15. Findings on int’l MF flows and crises • Investors withdraw from int’l MF during market downturns/ crisesKaminsky, Lyons & Schmukler (2001); Raddatz & Schukler (2012) • Movements in investor flows force reallocations in EM fundsJotikasthira, Lundblad & Ramdorai (2012) • MF investors show herding behavior but not differently during crisisBorensztein & Gelos (2003) • International MF act as a transmission channel during crises because of relative performance concernsBroner, Gelos & Reinhart (2006)

16. Possible future research • Increase in home bias during crises? • How are international portfolios reallocated during crises?

17. Increase in home bias? • Evidence of strong home bias in MF investmentsChan, Covrig & Ng (2005), Hau & Rey (2008) • Does this change during a crisis? • In banking yes. Arguments: • Domestic loans more likely bailed out/ support can come with strings attached • Harder to meet capital requirements, so tendency to reduce riskier (= foreign) assets • Monitoring and screening foreign loans more difficult • But what about MF investments?

18. Increase in home bias? Different arguments can be made: • Diversification benefits higher during times or stress • Factors driving equity home bias in normal times (Chan, Covrig & Ng, 2005) might become stronger during crisis • Familiarity • High information cost stronger impediment when risk of default is larger • Stock market development • Ability to quickly liquidate without large price effects and low transactions costs matters more when markets are volatile

19. Increase in home bias? • Ultimately is empirical question which can be answered with these data when adding domestic MF to the dataset • Relative withdrawal investors from international compared to domestic MF • Since MF domiciled in various countries can control for flight to quality effect • Reallocation managers in global funds towards domestic market

20. How are portfolios reallocated? • Managers actively adjust country weights over time (incl. in reaction to crises)Broner, Gelos, Reinhart (2006); Raddatz & Schmukler (2012); Jotikasthira, Lundblad & Ramadorai (2012) • Therefore MF play role in propagation of shocks across borders • Important to understand as impact on stability of capital flows. • Scope for further research

21. How are portfolios reallocated? Revisit herding question (Borenzstein & Gelos, 2003): • BG construct measure of herding based on observed changes in flows in/out of country by MFs • Herding same in tranquil and crisis times • But cannot/do not differentiate between herding among investors and managers • Interesting to isolate the two • Investor decisions force reallocations of portfolios (Jotikasthira, Lundblad & Ramadorai, 2012)

22. How are portfolios reallocated? With these data this is possible • Do investors herd? Do managers herd? To what extent do they reinforce each other? Tranquil vs crisis times? • Especially of interest (to me) is behavior of managers given a funding shock (global crisis) • Banks: no evidence herding behavior • MF manager: ? • Relative performance matters  incentive follow herd • Yes/no herding, which countries? • More liquid markets (Jotikasthira, Lundblad & Ramadorai, 2012) • But what else?

23. Data with lot of potential Jumping through some hoops (data collection) and with some creativity a lot can be accomplished! Iniesta – EURO 2012

24. THANK YOU