We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Thank you!
Presentation is loading. Please wait.
Published byMakayla McPherson
Modified over 2 years ago
Sandy Lai SMU 1 The Role of Equity Funds in the Financial Crisis Propagation Harald Hau INSEAD
Motivation and Key Findings © Harald Hau, INSEAD 2 Subprime exposure was concentrated in financial stocks which account for only 15% of the US stock market in 2007 How could this lead to a 50% decline of the non-financial stocks? This paper examine the role of mutual funds as a channel of asset contagions from financial to non-financial stocks Document that the 29.5% stocks most exposed (via stock ownership) to distressed funds have an under- performance of 35% at the peak of the crisis
Hypotheses © Harald Hau, INSEAD 3 H1: Simple Fire Sale Hypothesis Stocks owned by equity funds with high exposure to bank stocks in 2007/2 and 2008/1 face larger selling pressure and show poor crisis performance. H2: Stock Performance Dependent Fire Sales Hypothesis Distressed funds sell primarily better performing stocks when in distress Valuation Uncertainty makes over-performing stocks better sells Disposition Effect Tax Effect H3: Fund Share Stability Hypothesis Stocks with a large share of (non-distressed) fund owners perform better during the crisis Panic sales by direct retail investors Self-selection of retail investors into fund and direct investors
Literature What is contagion? Forbes and Rigobon (JF, 2001): Asset interdependence and crisis specific effects are difficult to disentangle Need to think about contagion channel and its identification Example: Gelos and Reinhard (2006) Equity fire sales Coval and Stafford (2007) Limits to arbitrage more severe in crisis Caballero and Simsek (2009) © Harald Hau, INSEAD 4
Identification Use stock and fund/investor level data to separate contagion effect from other linkages and macro crisis channels Procedure: Step 1: Measure fund exposure to financial stocks Step 2: Measure stock exposure to exposed (distressed) funds Stock exposure is a stock specific measure of fire sale pressure which differs across stocks in the same country and industry; control for macro exposure via industry fixed effects © Harald Hau, INSEAD 5
Data Fund holding data: 27,274 equity funds in 69 countries Reported holding concern approximately 30,000 stocks After data filtering: Work with 20,477 funds Report 16,045 billion in assets under management in June 2007 © Harald Hau, INSEAD 6
Summary Statistics © Harald Hau, INSEAD 7 [...]
From Fund Exposure to Stock Exposure © Harald Hau, INSEAD 8 Fund exposure: Return loss (if larger than 1%) due to financial stock investments in 2007/2 and 2008/1 Stock exposure: Aggregate fund exposure of all funds holding a stock weighted by fund ownership relative to capitalization
Exposed versus Non-Exposed Stocks Define exposure dummy DExp for 15% most exposed stocks worldwide We find that exposed stocks are concentrated in the U.S. market (29.5%) are spread over all industries are on average larger than non-exposed stocks show a drastic reduction of their fund holdings relative to non-exposed stocks No evidence that exposed funds are different Same average pre-crisis return on assets © Harald Hau, INSEAD 9
Fund Redemption © Harald Hau, INSEAD 10
Fund Holding Changes During Crisis © Harald Hau, INSEAD 11
Factor model for risk adjustment of returns estimated for July 2003 to July 2007: Excess returns for crisis period Cumulative excess return Calculation of Excess Returns © Harald Hau, INSEAD 12
Relative Underperformance of Exposed Stocks © Harald Hau, INSEAD 13 Feb 27, 2009: -35%
H1: Evidence on Fire Sale Hypothesis Stocks owned by distressed funds dramatically underperform during the crisis relative to industry peers Return shortfall of 35% on February 27, 2009 for the 29.5% most exposed U.S. Stocks Also large effects for non-U.S. stocks Fire sale discounts are transitory Contagion channel through fund ownership can account for at least 10% of the downturn in non-financial stocks © Harald Hau, INSEAD 14
H2: Stock Performance Dependent Fire Sales? © Harald Hau, INSEAD 15
Matching Evidence on Holding Changes © Harald Hau, INSEAD 16 Additional Holding Reduction by Exposed Stocks Additional Holding Reduction by 25% Best Performing Exposed Stocks
H3: Are Stocks with high Fund Share more stable? © Harald Hau, INSEAD 17
Are Direct Investors more Panic-Prone? Retail investors with direct investments might be more prone to panic than those investing through mutual funds; hence a high fund share increases a stocks crisis resilience Fund ownership share and NYSE retail trading volume have correlation of Define two long-short portfolio loading on stocks with (i) high direct ownership share (DMF = direct minus fund) (ii) high retail trading (RMI = retail minus institutional) VAR structure: © Harald Hau, INSEAD 18
Impulse Response of DMF Portfolio to Index Return Shock © Harald Hau, INSEAD 19
Summary of VAR Evidence Evidence of Granger causality from index returns to the DMF portfolio return Find Granger Causality during the two crisis periods, but not before the crisis Spill-over occurs (mostly) with a one-day lag It is economically large: A 1% index shock causes a DMF return of 0.41% for the DMF portfolio © Harald Hau, INSEAD 20
Summary of Findings Equity funds were a very important channel for asset contagion from bank stocks to non-financial stocks Paradoxically, fire sales are concentrated in the best performing stocks (Non-distressed) fund ownership increases a stocks crisis resilience Evidence of more flight to quality (retail investor panic) among direct than indirect (fund) investors © Harald Hau, INSEAD 21
Implications for Fund Management Information Management Ownership data becomes more widely available Keep updated information on ownership linkages Arbitrage Strategies Distressed selling can give rise to large return premia Retail investment biases create differential crisis sensitivity Retail investor related mispricing (Peress and Fang, JF 2009) Risk Management Retail ownership is an important stock characteristic capturing additional event/crisis exposure © Harald Hau, INSEAD 22
Sandy Lai SMU 1 The Role of Equity Funds in the Financial Crisis Propagation Harald Hau INSEAD Chong Tze Chua SMU.
1 Global versus Local Asset Pricing: A Speculation Based Test of Market Integration Imperial College London October 19, 2010 Harald Hau INSEAD
1 Financial Soundness Indicators Paul J.van Sluijs World Bank Nairobi, May 15 – 17, 2006.
Bank ratings: What determines their quality? 1 Harald Hau University of Geneva and SFI Sam Langfield ESRB David Marques-Ibanez.
1 A Tale of Two Platforms: Dealer Intermediation in the European Sovereign Bond Market CEPR Discussion Paper Peter Dunne,
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Copyright (c) 2006 Standard.
New England Pension Consultants Oklahoma State Pension Commission Investment Performance Analysis Quarter Ending 9/30/2001.
New England Pension Consultants. 1 Table of Contents > Market Environment > Asset Allocation / Investment Policy Targets > Performance Summary > Performance.
The Financial Crisis and its Implications for Regulation in the 21 st Century World Trade Institute, 17 November 2008 Judson Berkey.
Chapter 19 Globalization and International Investing Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
© 2008 Northern Trust Corporation northerntrust.com The Northern Trust Experience A C C E S S. E X P E R T I S E. S E R V I C E. Lori R. Runquist Director,
1 Portfolio management. 2 Portfolio management and investment banking Asset management and trading constitute the other major activity of IB, alongside.
The Usual Suspects: A Primer on Investment Banks Recommendations and Emerging Markets Javier Santiso Chief Economist and Deputy Director OECD Development.
1 A single-factor security market The single-index model Estimating the single-index model Topic 3 (Ch. 8) Index Models.
Day Two Period 9:00 to 10:40 AM. 22 Managing Market and Credit Risk –Market Risk –Credit Risk - General –The Credit Risk Model in Modern Banking –Lending.
© 2010, Morningstar, Inc. All rights reserved. ETF Liquidity Explained Bradley Kay Associate Director, European ETF Research Ben Johnson ETF Strategist.
1 FINC3131 Business Finance Chapter 2,6,8 Financial Markets, Interest, Return and Risk.
1 Using Stochastic Models in Risk and Capital Management in Life Assurance Tuesday 5 th April 2005 Craig Turnbull.
Overview of Financial Reporting for Employee Benefit Plans Presented by: Pugh & Company, P.C. August 10, 2010.
Slides prepared by Thomas Bishop Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 14 Money, Interest Rates, and Exchange Rates.
1 Growth review: Mid-sized businesses evidence base 29 November 2011.
1 The Value Line Investment Survey: The Value Line Investment Survey was created in 1931 to guide the investor to realize superior returns on invested.
©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston Chapter Share Repurchases.
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 40 The Stock Market Crashes.
5-1 Copyright 2009 McGraw-Hill Australia Pty Ltd PPTs t/a Deegan, Financial Accounting Theory 3e Financial Accounting Theory Craig Deegan Chapter 5 Normative.
Use of a DFA Model to Evaluate Reinsurance Programs Case Study Presented by: Robert F. Conger, FCAS Tillinghast – Towers Perrin 1999 CAS Seminar on Financial.
The Pricing Of Risk Understanding the Risk Return Relation.
CH 2CH 2 The Economics of Price Determination Kent B. Monroe (2007). Pricing: Making Profitable Decisions. 3 rd Edition (Singapore: McGraw-Hill).
© 2016 SlidePlayer.com Inc. All rights reserved.