| Abstract: |
Using micro-level data on mutual funds from different financial centers
investing in equity and bonds, this paper analyzes how investors and managers
behave and transmit shocks across countries. The paper shows that the
volatility of mutual fund investments is quantitatively driven by investors
through injections of capital into, or redemptions out of, each fund, and by
managers changing the country weights and cash in their portfolios. Both
investors and managers respond to returns and crises, and substantially adjust
their investments accordingly. These mechanisms generated large capital
reallocations during the global financial crisis. Their behavior tends to be
pro-cyclical, reducing their exposure to countries experiencing crises and
increasing it when conditions improve. Managers actively change country
weights over time, although there is significant short-run "pass-through,"
meaning that price changes affect country weights. Consequently, capital flows
from mutual funds do not seem to stabilize markets and instead expose
countries to foreign shocks. |