Events at CERGE-EI

Georgios Georgiadis, Ph.D.

European Central Bank

Authors: Pablo Anaya Longaric, Katharina Cera, Georgios Georgiadis and Christoph Kaufmann

Abstract: We explore whether investment funds transmit spillovers from local shocks to financial markets in other economies. As a laboratory we consider shocks to financial market beliefs about the probability of a rare, euro-related disaster and their spillovers to Asian sovereign debt markets. Given their geographic distance from and relatively limited macroeconomic exposure to the euro area, these markets are an ideal testing ground a priori stacking the deck against finding evidence for investment funds transmitting spillovers from euro disaster risk shocks. Analyzing proprietary security level holdings data over the period from 2014 to 2023, we find that investment funds strongly shed Asian sovereign debt in response to euro disaster risk shocks. Markets with greater investment-fund presence exhibit considerably larger price spillovers. The main driver of this sell-off is the need to generate liquidity to meet investor redemption demands rather than portfolio rebalancing. Especially market liquidity determines which sovereign debt investment funds shed. Taken together, our findings suggest that due to a flighty investor base investment funds are powerful transmitters of spillovers from local shocks across global financial markets.

Keywords: Investment funds, spillovers, sovereign debt markets, euro disaster risk shocks.
JEL Codes: F34, F45, G23.

Full Text: From Brussels to Bangkok: How Investment Funds Transmit Financial Spillovers