Research in Progress

“Unexploited Gains from International Diversification in the Mutual Fund Industry”, joint with R. Rigobon and S. Schmukler. Work in Progress.
Presented at the LACEA 2006 Annual Meetings, Mexico City, Mexico and at the American Economic Association 2007 Annual Meetings, Chicago, IL.

Abstract: This paper studies the lack of perfect international diversification by analyzing unique micro data on U.S. institutional investors’ international holdings. It focuses on three questions related to international investment and access to international capital markets. First, does the structural change in the U.S. mutual fund industry towards more “aggregation” (favoring larger funds that invest globally over smaller funds that invest in specific countries or regions) affect countries and firms? Second, are investors forgoing gains from international diversification by shifting to more global funds? Third, what explains this shift in the industry toward more global funds, particularly if diversification gains are being forgone? The work has several important implications for emerging and transitional economies trying to attract foreign capital and trying to develop their own institutional investor bases. It sheds some light on the scope of action that government and companies have when attracting funds from domestic and international institutional investors. It also highlights how sensitive these investments are to several country and firm-level factors.

"Happy Tiger, Expensive Dragon? Speculation, Optimism, and Segmentation in China’s Stock Market", joint with J. Tessada. Work in Progress.

Abstract: Chinese stock markets were completely segmented until very recently. Firms could issue identical shares except for ownership restrictions: shares for domestic investors (A shares) and shares for foreign investors (B and H shares). Although domestic shares traded in other markets in similar situations have usually been traded at a discount, in China A shares are traded at a premium over B and H shares. In this project, we explore this apparent disparity. We extend a model of speculation and optimism in stock markets to incorporate heterogeneous investors and segmented markets. Preliminary results suggest that this theoretical framework can reconcile these two cases. A regulatory change allows domestic investors to trade B shares let us empirically analyze the mechanisms proposed using the still segmented H market. The goal of this work is to shed some light on issues of capital account liberalization in a large developing country. We also want to examine factors that can make capital flows more stable in the process of opening of the capital account, with emphasis on the factors driving the behavior of individual investors in domestic and foreign markets.

“The First Five Years of the Inflation-Targeting Regime in Brazil: Central Bank’s Responses to Demand and Supply Inflation.” Work in Progress.

Abstract: In spite of vast evidence that an inflation-targeting regime is in general successful in reducing the inflation rate, the early figures for Brazil do not corroborate this pattern. During the first five years of the regime, the inflation rate was 8.8% a year, missing the upper-band of the target rate in the last three years. This has led some observers to wonder whether the inflation targeting-regime was credible in Brazil. This paper argues that the Central Bank was responsive to both past and future inflation pressures. By decomposing the inflation rate into its demand, supply, and long-run components, we provide some preliminary evidence that the country was hit by several supply shocks during this period. The Central Bank of Brazil did indeed respond as theory would recommend. It fought demand shocks, accommodated the first order effects of a supply shock and repressed its secondary effects. The findings reported in this paper may help explain why the Central Bank’s policies remained credible during this period.