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Emerging Market Spreads at the Turn of The Century: A Roller Coaster Sergio Godoy

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  • Sergio Godoy

Abstract

This paper examines the empirical behavior of monthly secondary spreads from eighteen emerging market economies located in Asia, East Europe and Latin America from October 1997 to September 2002, a particularly turbulent period. A succession of events affected these economies such as the Asian crisis, the Russian default, the Brazilian devaluation, the Ecuadorian default, the Turkish crisis and the Argentine default. Our empirical estimations allow us to construct taxonomy of these crises. First, the Russian default and the Turkish crisis correspond to episodes of global reduction of portfolio flows to emerging sovereign debt markets. Second, the Brazilian devaluation was fundamentally an abatement of portfolio flows to Latin America and East Europe (except for Russia). Third, the Asian crisis and the Ecuadorian default were consistent with a rebalancing of portfolios in emerging markets. Fourth, although the Argentine crisis shares some similarities with the former crises, it is unique in the sense that it was fully anticipated long before it happened. Finally, in light of these results, policy-makers in emerging markets should be keenly aware of the possibility that their country might be hit by a crisis so structural reforms should also include policies that help to protect the country from these unruly episodes.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 339.

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Date of creation: Dec 2005
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Handle: RePEc:chb:bcchwp:339

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  1. Boehmer, Ekkehart & Megginson, William L, 1990. " Determinants of Secondary Market Prices for Developing Country Syndicated Loans," Journal of Finance, American Finance Association, vol. 45(5), pages 1517-40, December.
  2. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  3. Christian B. Mulder & Brieuc Monfort, 2000. "Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies," IMF Working Papers 00/69, International Monetary Fund.
  4. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, 09.
  5. Carmen M. Reinhart, 2002. "Default, Currency Crises, and Sovereign Credit Ratings," World Bank Economic Review, World Bank Group, vol. 16(2), pages 151-170, August.
  6. Jeremy I. Bulow & Kenneth Rogoff, 1988. "Sovereign Debt: Is To Forgive To Forget?," NBER Working Papers 2623, National Bureau of Economic Research, Inc.
  7. Glick, Reuven & Rose, Andrew K, 1998. "Contagion and Trade: Why are Currency Crises Regional," CEPR Discussion Papers 1947, C.E.P.R. Discussion Papers.
  8. Fabio Canova, 2005. "The transmission of US shocks to Latin America," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 229-251.
  9. Pettis, Michael, 2001. "The Volatility Machine: Emerging Economies and the Threat of Financial Collapse," OUP Catalogue, Oxford University Press, number 9780195143300.
  10. Kristin J. Forbes, 2001. "Are Trade Linkages Important Determinants of Country Vulnerability to Crises?," NBER Working Papers 8194, National Bureau of Economic Research, Inc.
  11. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  12. Masson, Paul, 1999. "Contagion:: macroeconomic models with multiple equilibria," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 587-602, August.
  13. Hong G. Min, 1998. "Determinants of emerging market bond spread : do economic fundamentals matter?," Policy Research Working Paper Series 1899, The World Bank.
  14. Franklin R. Edward, 1999. "Hedge Funds and the Collapse of Long-Term Capital Management," Journal of Economic Perspectives, American Economic Association, vol. 13(2), pages 189-210, Spring.
  15. Cifarelli, Giulio & Paladino, Giovanna, 2006. "Volatility co-movements between emerging sovereign bonds: Is there segmentation between geographical areas?," Global Finance Journal, Elsevier, vol. 16(3), pages 245-263, March.
  16. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
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Cited by:
  1. Sergio Godoy W., 2006. "Determinantes de la Clasificación de Riesgo Soberano de las Economías Emergentes," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 109-123, December.
  2. Jorge Selaive C., 2006. "Premio Soberano: Efecto de Movimientos en las Tasas de Interés Internacionales," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(2), pages 73-80, August.

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