Vilfredo Pareto Research Seminar
Kenza Benhima

Granular Expectation Shocks and International Financial Contagion

Kenza Benhima, HEC Lausanne
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Room S4, Maison de la paix, Geneva

As part of the Vilfredo Pareto Research Seminar series, the International Economics Department at the Geneva Graduate Institute is pleased to invite you to a public talk given by Kenza Benhima,  joint with Elio Bolliger and Margaret Davenport

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Granular Expectation Shocks and International Financial Contagion



Using a unique dataset linking investors’ cross-country GDP growth expectations to their investments into mutual funds and to the mutual funds’ cross-country allocation, we show that, while the flows into the funds are sensitive to the investors’ fund-specific aggregate expectations (computed using the fund’s portfolio shares), the funds’ allocation reacts less to the country-level expectations.

This gives rise to “co-ownership spillovers”, whereby negative expectations about a country in which a fund invests can adversely affect capital flows to the other countries that are part of the fund’s portfolio. Using a portfolio choice model with delegated investment, we show that these results arise naturally from a sticky portfolio friction. However, these spillovers matter in the aggregate only if the portfolio shares are granular.

Finally, using our data-based estimates and our model, we quantify the aggregate implications of these spillovers and find that co-ownership spillovers account for one fourth to one third of the comovement in expectation-driven capital flows.




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