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Emerging Market Economies: The Aftermath of Volatility Contagion in a Selection of Three Financial Crises

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  • Felipe Jaque
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    Abstract

    This paper examines the volatility contagion resulting from intra- and inter- regional links among emerging economies, on the basis of three major financial crises, namely Mexico 1994, East Asia 1997 and Argentina 2002. In particular, it presents a methodology that uses the sovereign bond spread as the financial time series to determine the impact of the volatility of the first-infected country on the behaviour of other emerging economies. Our main results reveal that only the Asia 1997 crisis had negative effects —both within and outside the region— on other emerging economies, in the form of increased sovereign spread volatility. On the other hand, the crises of Mexico 1994 and Argentina 2002 seem to have caused a minor additional effect on the stability of international markets for emerging bonds.

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    Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 305.

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    Date of creation: Dec 2004
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    Handle: RePEc:chb:bcchwp:305

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    1. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    2. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
    3. Marcus Miller & Lei Zhang, 1999. "Creditor Panic, Asset Bubbles and Sharks: Three Views of the Asian Crisis," CSGR Hot Topics: Research on Current Issues 07, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
    4. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
    5. Dooley, Michael P, 2000. "A Model of Crises in Emerging Markets," Economic Journal, Royal Economic Society, vol. 110(460), pages 256-72, January.
    6. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
    7. Sebastian Edwards, 1998. "Interest Rate Volatility, Capital Controls, and Contagion," NBER Working Papers 6756, National Bureau of Economic Research, Inc.
    8. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
    9. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    10. Dornbusch, Rudiger & Park, Yung Chul & Claessens, Stijn, 2000. "Contagion: Understanding How It Spreads," World Bank Research Observer, World Bank Group, vol. 15(2), pages 177-97, August.
    11. Sy, Amadou N. R., 2002. "Emerging market bond spreads and sovereign credit ratings: reconciling market views with economic fundamentals," Emerging Markets Review, Elsevier, vol. 3(4), pages 380-408, December.
    12. Rodrigo O. Valdés & Leonardo Hernández, 2001. "What Drives Contagion," IMF Working Papers 01/29, International Monetary Fund.
    13. Hernandez, Leonardo F. & Valdes, Rodrigo O., 2001. "What drives contagion: Trade, neighborhood, or financial links?," International Review of Financial Analysis, Elsevier, vol. 10(3), pages 203-218.
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