The Role of Equity Funds in the Financial Crisis Propagation

The early stage of the recent .nancial crisis was marked by large value losses for bank stocks. This paper identi.es the equity funds most a¤ected by this valuation shock and examines its consequences for the non-.nancial stocks owned by the respective funds. We find that (i) ownership links to these .distressed equity funds. lead to large underper-formance of the most exposed non-.nancial stocks, and in aggregate this contributes an additional 10% to the overall stock market downturn; (ii) distressed .re sales and the associated price discounts are concentrated among those exposed stocks which perform relatively well; and (iii) stocks with higher fund ownership generally performed much better throughout the crisis.