Are Foreigners the Vectors of Contagion? A Study of Seven Emerging Markets

Abstract

We investigate the role of Foreigners, local Institutions and local individuals in days of Contagion in a set of seven emerging markets from 2007 to 2016. We propose and use a simple measure of the degree of Contagion based on the probability of a coincidence of daily negative returns in both the S&P500 and the local index, in excess of what is explained by fundamentals. Using a VAR setting, we find that Foreigners net sales induce Contagion, and that they keep selling after Contagion days, acting as the transmitters of large price drops from US to the seven emerging markets. Local Institutions are also net sellers in Contagion days, but they become net buyers in the following days, along with individuals.

Keywords: Contagion, Foreign flows, Institutional investors, Individual investors, Emerging Markets

JEL Classification: G14, G15, D82