Granular Expectation Shocks and International Financial Contagion
Using a unique dataset linking investors' cross-country GDP growth expectations to their investments into mutual funds and to the mutual funds' cross-country allocation, we show that, while the flows into the funds are sensitive to the investors' fund-specific aggregate expectations (computed using the fund's portfolio shares), the funds' allocation reacts less to the country-level expectations. This gives rise to ``co-ownership spillovers'', whereby negative expectations about a country in which a fund invests can adversely affect capital flows to the other countries that are part of the fund's portfolio. Using a portfolio choice model with delegated investment, we show that these results arise naturally from a sticky portfolio friction. However, these spillovers matter in the aggregate only if the portfolio shares are granular. Finally, using our data-based estimates and our model, we quantify the aggregate implications of these spillovers and find that co-ownership spillovers account for one fourth to one third of the comovement in expectation-driven capital flows.