Crisis, contagion, and country funds: effects on East Asia and Latin America
AbstractSpillovers effects, from one country or region to other countries and regions, have attracted renewed attention in the aftermath of the Mexican crisis of December 1994. This paper uses data on closed-end country funds to study how a negative shock in Mexican equities is transmitted to Asia and Latin America, and to particular countries within each region. Country funds allow us to study the transmission to other fund net asset values (NAVs) and prices, which are traded in local stock markets in New York, respectively. The evidence indicates that shocks such as the Mexican crisis produce spillover effects which are less strong in Asia than in Latin America. The shocks seem to affect Latin American NAVs directly, while transmission to Asian NAVs appears to "pass through" the New York investor fund community, rather than directly from equity prices in Asia. Even though the data show that co-movements are stronger within each regional market --East Asia, Latin America, and New York-- than between them, investors do treat different countries differently. Shocks such as the Mexican 1994 crisis seem to have a stronger impact in countries with weak fundamentals. A high/export ratio makes the Philippines vulnerable, for example, despite its location in East Asia, while a low debt/export ratio makes Chile relative less vulnerable, despite its location in South America.
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Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 96-04.
Date of creation: 1996
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Publication status: Published in Managing capital flows and exchange rates : perspectives from the Pacific basin (Cambridge University Press, 1998)
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- Jeffrey A. Frankel & Sergio L. Schmukler, 1996. "Crisis, contagion, and country funds: effects on East Asia and Latin America," Proceedings, Federal Reserve Bank of San Francisco, pages 232-266.
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