Asset Fire Sales and Purchases and the International Transmission of Funding Shocks

We identify a new channel for the transmission of shocks across international markets. Investor flows to funds domiciled in developed markets force significant changes in these funds emerging market portfolio allocations. These forced trades or fire sales affect emerging market equity prices, correlations, and betas, and are related to but distinct from effects arising purely from fund holdings or from overlapping ownership of emerging markets in fund portfolios. A simple model and calibration exercise highlight the importance to these findings of push effects from funds domicile countries and co-ownership spillover between markets with overlapping fund ownership.