Cover IMF Working Papers
Portfolio Diversification, Leverage, and Financial Contagion
Author: T. Todd Smith and Mr. Garry J. Schinasi
Series:
IMF Working Papers
Volume/Issue:
Volume 1999: Issue 136
Language:
English
Publication Date:
01 Oct 1999
DOI:
https://doi.org/10.5089/9781451855791.001
ISBN:
9781451855791
ISSN:
1018-5941
Pages:
38
Keywords:
WP; management rule; asset position; margin call; financial contagion; portfolio choice; leverage; portfolio management rule; risky assets; portfolio manager; return distribution; leveraged portfolio; conditional asset return distribution; current-period portfolio allocation problem of a portfolio manager; B. portfolio management; Vector autoregression; Personal income; Stocks; Securities markets; Asia and Pacific
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Models of “contagion” rely on market imperfections to explain why adverse shocks in one asset market might be associated with asset sales in many unrelated markets. This paper demonstrates that contagion can be explained with basic portfolio theory without recourse to market imperfections. It also demonstrates that “Value-at-Risk” portfolio management rules do not have significantly different consequences for portfolio rebalancing and contagion than other rules. The paper’s main conclusion is that portfolio diversification and leverage may be sufficient to explain why investors would find it optimal to sell many higher-risk assets when a shock to one asset occurs.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund