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Contagion of Financial Crises in Sovereing Debt Markets

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Author Info
Sandra Lizarazo () (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

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Abstract

This paper develops a quantitative model of debt, default, and contagion of financial crises for small open economies that interact with risk averse international investors. The paper extends the recent literature on endogenous default risk to the case in which several emerging economies that cannot credibly commit to honor their international debts have common investors. The existence of common investors with preferences that exhibit decreasing absolute risk aversion generates financial links between the emerging economies sovereign debt markets that help to explain the endogenous determination of credit limits, capital flows, and the risk premium in sovereign bond prices as function not only of the economy's fundamentals, the investors' characteristics (wealth, and degree of risk aversion) but more importantly of the fundamentals of other emerging economies. Therefore this paper provides a theoretical formalization that is the base for and endogenous explanation of the contagion of financial crises.

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Publisher Info
Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0907.

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Length: 65 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:cie:wpaper:0907

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Related research
Keywords: Contagion; Sovereign Debt; Financial Links; Default;

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Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
  21. Taimur Baig & Ilan Goldfajn, 2000. "The Russian Default and the Contagion to Brazil," IMF Working Papers 00/160, International Monetary Fund.
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  24. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP). [Downloadable!]
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  25. Kristin Forbes & Roberto Rigobon, 2000. "Contagion in Latin America: Definitions, Measurement, and Policy Implications," NBER Working Papers 7885, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  29. Xinshen Diao & Wenli Li & Erinc Yeldan, 2000. "How the Asian crisis affected the world economy : a general equilibrium perspective," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 35-59. [Downloadable!]
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  31. Erik Durbin & David Tat-Chee Ng, 1999. "Uncovering country risk in emerging market bond prices," International Finance Discussion Papers 639, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2007. "Quantitative models of sovereign default and the threat of financial exclusion," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 251-286. [Downloadable!]
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