The Role of Equity Funds in the Financial Crisis Propagation

Author(s): Harald Hau, Sandy Lai

CEPR Discussion Paper Number 8819
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Programme Area(s): Financial Economics (FE), International Macroeconomics (IM)

Date of Publication: 01/02/2012

Keyword(s): Financial Crisis Propagation, Fire Sales, Mutual Funds

JEL(s): G11, G14, G23

Abstract: The early stage of the recent financial crisis was marked by large value losses for bank stocks. This paper identifies the equity funds most affected by this valuation shock and examines its consequences for the non-financial stocks owned by the respective funds. We find that (i) ownership links to these 'distressed equity funds' lead to large underperformance of the most exposed non-financial stocks, and in aggregate this contributes an additional 10.9% to the overall stock market downturn; (ii) distressed fire sales and the associated price discounts are concentrated among those exposed stocks which perform relatively well; and (iii) stocks with higher fund ownership generally performed much better throughout the crisis.

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