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

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

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 (+)

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

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

What about the discussion?

Ideas for future research

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

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

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

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

Increase in home bias? Evidence of strong home bias in MF investments Chan, 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?

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

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

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

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)

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?

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

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