Emerging Markets Contagion: Evidence and Theory
68 Pages Posted: 22 May 2000
Abstract
Using secondary market debt prices and country credit ratings, this paper provides evidence of contagion in emerging markets. It shows that fundamentals are unable to explain the cross-country comovement of creditworthiness in Latin American countries. It also shows that contagion cannot be explained by big news events, such as Brady announcements, and that it is asymmetric, being stronger for negative innovations in creditworthiness. In contrast, in a control group composed of US corporate bond prices and credit ratings of a group of medium size OECD countries, fundamentals explain all the observed correlation. The paper presents a simple model trying to explain this puzzle. It combines illiquid countries with investors who potentially need liquidity in order to change their portfolio. The basic intuition is that if investors require liquidity and they do not find it in one country, then they will seek funds in a second country. Under two alternative equilibrium definitions, the model shows that the probability of repayment of one country is negatively affected by the degree of illiquidity of other countries--an apparently country-specific characteristic.
JEL Classification: F33, F34
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Leading Indicators of Currency Crises
By Graciela Kaminsky, Saul Lizondo, ...
-
By Barry Eichengreen, Andrew Kenan Rose, ...
-
By Barry Eichengreen, Andrew Kenan Rose, ...
-
Financial Crises in Emerging Markets: The Lessons from 1995
By Jeffrey D. Sachs, Aaron Tornell, ...
-
A Rational Expectations Model of Financial Contagion
By Laura E. Kodres and Matt Pritsker
-
Financial Intermediaries and Markets
By Franklin Allen and Douglas M. Gale