Rational Contagion and the Globalization of Securities Markets
Rational Contagion and the Globalization of Securities Markets
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Date
2000-06
Authors
Calvo, Guillermo A.
Mendoza, Enrique G.
Advisor
Citation
Calvo, Guillermo A. and Enrique G. Mendoza, "Rational Contagion and the Globalization of Securities Markets," Journal of International Economics, Volume 51, Issue 1, June 2000, Pages 79-113.
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Abstract
This paper argues that globalization may promote contagion by weakening incentives for
gathering costly information and by strengthening incentives for imitating arbitrary
market portfolios. In the presence of short-selling constraints, the gain of gathering
information at a fixed cost may diminish as markets grow. Moreover, if a portfolio
manager’s marginal cost for yielding below-market returns exceeds the marginal gain
for above-market returns, there is a range of optimal portfolios in which all investors
imitate arbitrary market portfolios and this range widens as the market grows.
Numerical simulations suggest that these frictions can have significant implications for
capital flows in emerging markets.