Spanish Mutual Funds Prop Up Spanish Bank Share Prices

H/T Jayanth R Varma Financial Markets Blog

“The authors point out that “Strictly speaking, price support activities by mutual funds are illegal, as the trades are not necessarily placed in the interest of the fund investors.” However they also believe that Spain is a country in which such crimes are not closely monitored and are not severely prosecuted.”

Abstract (via Golez & Marin @ SSRN)

The interplay of delegated portfolio management and asset management ownership generates a double agency problem that may result on trading to support security prices. We test this hypothesis analyzing the trading patterns of mutual funds affiliated with banks with the stocks of their controlling banks. We show that affiliated mutual funds tend to increase the holdings of the parent bank stock following a large drop in the stock price of the bank. Further, we provide evidence that these patterns of trading are not consistent with portfolio rebalancing into the banking sector, contrarian trading or timing skills. We also provide evidence that the patterns of trading are not information-driven. This leads us to conclude that affiliated mutual funds follow this strategy to support the price of the parent bank

Click Here To Read: Spanish Mutual Funds Prop Up Spanish Bank Share Prices (I smell conflicts of interest)

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09. November 2010 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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