The Domestic Transmission of International Shocks: Evidence from US and Mexican Mutual Funds

Abstract

In this study, I demonstrate that international mutual funds can cause temporary stock price deviations from fundamentals in the countries they have positions in. I show that US mutual funds massively sold their Mexican equity when the recent crisis was developing, which then led to the average undervaluation of Mexican stocks that were held by US funds (i.e., the exposed stocks). I establish that Mexican domestic funds responded to this underpricing heterogeneously; Mexican funds that owned the exposed stocks joined the US funds in selling, while those that did not bought the undervalued Mexican stocks. I provide evidence that these Mexican fund trades likewise had an impact on Mexican equity prices. Exposed stocks that were not in the portfolios of selling Mexican funds were in fact not subject to underpricing, while those that were were the ones driving the average undervaluation of all exposed stocks. This implies that the purchases by some Mexican funds were successful in counterbalancing the price pressure from US funds, while the sales by the others exacerbated the mispricing.