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Crisis, contagion, and country funds: effects on East Asia and Latin America

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  • Jeffrey Frankel
  • Sergio Schmukler

Abstract

Spillovers 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 Info

Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 96-04.

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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)
Handle: RePEc:fip:fedfpb:96-04

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Keywords: Financial crises - Asia ; Financial crises - Latin America ; Financial crises - Mexico ; East Asia ; Latin America ; Mexico ; International finance ; Mutual funds;

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Cited by:
  1. Ganapolsky, Eduardo J. J. & Schmukler, Sergio L., 1998. "The impact of policy announcements and news on capital markets : crisis management in Argentina during the Tequila Effect," Policy Research Working Paper Series 1951, The World Bank.
  2. Ramkishen Rajan & Rahul Sen & Reza Y. Siregar, 2002. "Hong Kong, Singapore and the East Asian Crisis: How Important were Trade Spillovers?," Working Papers 142002, Hong Kong Institute for Monetary Research.
  3. Graciela L. Kaminsky & Carmen Reinhart, 2003. "The Center and the Periphery: The Globalization of Financial Turmoil," NBER Working Papers 9479, National Bureau of Economic Research, Inc.
  4. G.G. Kaufman, 2000. "Banking and Currency Crises and Systemic Risk: A Taxonomy and Review," DNB Staff Reports (discontinued) 48, Netherlands Central Bank.
  5. Omar F. Saqib, 2002. "Interpreting Currency Crises: A Review of Theory, Evidence, and Issues," Discussion Papers of DIW Berlin 303, DIW Berlin, German Institute for Economic Research.
  6. Sandra Lizarazo, 2009. "Default Risk and Risk Averse International Investors," Working Papers 0907, Centro de Investigacion Economica, ITAM.
  7. Norman Loayza & Humberto Lopez & Angel Ubide, 1999. "Comovement and Macroeconomic Interdependence: Evidence for Latin America, East Asia, and Europe," Working Papers Central Bank of Chile 60, Central Bank of Chile.
  8. Radovan Vadovic, 2009. "Early, Late, and Multiple Bidding in Internet Auctions," Working Papers 0904, Centro de Investigacion Economica, ITAM.
  9. George G. Kaufman, 1999. "Banking and currency crises and systemic risk: a taxonomy and review," Working Paper Series WP-99-12, Federal Reserve Bank of Chicago.
  10. Kristin Forbes, 2000. "The Asian Flu and Russian Virus: Firm-level Evidence on How Crises are Transmitted Internationally," NBER Working Papers 7807, National Bureau of Economic Research, Inc.
  11. Han, Ki C. & Lee, Suk Hun & Suk, David Y., 2003. "Mexican peso crisis and its spillover effects to emerging market debt," Emerging Markets Review, Elsevier, vol. 4(3), pages 310-326, September.
  12. Reinhart, Carmen & Montiel, Peter, 2001. "The Dynamics of Capital Movements to Emerging Economies During the 1990s," MPRA Paper 7577, University Library of Munich, Germany.
  13. Ramkishen S. Rajan & Chung-Hua Shen, 2002. "Are crisis-induced devaluations contractionary?," Pacific Basin Working Paper Series 02-06, Federal Reserve Bank of San Francisco.
  14. Demir, Firat, 2006. "Volatility of short term capital flows, financial anarchy and private investment in emerging markets," MPRA Paper 3080, University Library of Munich, Germany, revised May 2007.
  15. Jose Antonio R. Tan, III, 1998. "Contagion effects during the Asian financial crisis: stock price data," Pacific Basin Working Paper Series 98-06, Federal Reserve Bank of San Francisco.
  16. Reinhart, Carmen & Calvo, Guillermo, 1999. "The Consequences and Management of Capital Inflows: Lessons for Sub-Saharan Africa," MPRA Paper 7901, University Library of Munich, Germany.

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