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The impact of policy announcements and news on capital markets : crisis management in Argentina during the Tequila Effect

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Author Info

  • Ganapolsky, Eduardo J. J.
  • Schmukler, Sergio L.

Abstract

Argentina was hit hard by the Mexican crisis of 1994-95. The Argentine peso came under attack and there was a run on bank deposits. Argentina'successfully announced a series of policies to mitigate the spillover effects, without abandoning its currency board. The authors show how capital markets reacted to each policy announcement and piece of breaking news. They find that Argentina's agreement with the International Monetary Fund, the dollarization of reserve deposits in the central bank, and the reduction in reserve requirements, among other things, had a strong positive impact on market returns. The market welcomed announcements that reflected the adoption of credible policies and demonstrated a firm commitment to the currency board. The authors also find that, after a period of higher volatility, the appointment of a new finance minister (after Domingo Cavallo left the finance ministry) calmed down stock and bond markets, significantly decreasing the variance in stock and bond market returns. On the other hand, the interest rate became more volatile after the appointment of the new finance minister and when reserve requirements were lowered.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1951.

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Date of creation: 31 Jul 1998
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Handle: RePEc:wbk:wbrwps:1951

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Related research

Keywords: Economic Theory&Research; Banks&Banking Reform; Financial Intermediation; Environmental Economics&Policies; Financial Economics;

References

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  1. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1996. "Contagious Currency Crises," NBER Working Papers 5681, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Calvo, Sara, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?”," MPRA Paper 7124, University Library of Munich, Germany.
  3. 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.
  4. Berry, Thomas D & Howe, Keith M, 1994. " Public Information Arrival," Journal of Finance, American Finance Association, vol. 49(4), pages 1331-46, September.
  5. Harvey, Campbell R & Huang, Roger D, 1991. "Volatility in the Foreign Currency Futures Market," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 543-69.
  6. Tim Bollerslev & Jeffrey M. Wooldridge, 1988. "Quasi-Maximum Likelihood Estimation of Dynamic Models with Time-Varying Covariances," Working papers 505, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September.
  8. Charles M. Jones & Owen Lamont & Robin Lumsdaine, 1996. "Public Information and the Persistence of Bond Market Volatility," NBER Working Papers 5446, National Bureau of Economic Research, Inc.
  9. Hardouvelis, Gikas A., 1988. "Economic news, exchange rates and interest rates," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 23-35, March.
  10. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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Cited by:
  1. Brock, Philip L., 1998. "Financial safety nets and incentive structures in Latin America," Policy Research Working Paper Series 1993, The World Bank.
  2. Marcelo Dabos & Maria Laura Gomez Mera, 1998. "The Tequila Banking Crisis in Argentina," Working Papers 19, Universidad de San Andres, Departamento de Economia, revised Sep 1999.
  3. Mahua Barari & Brian Lucey & Svitlana Voronkova, 2005. "CEE Banking Sector Co-Movement: Contagion or Interdependence?," The Institute for International Integration Studies Discussion Paper Series iiisdp078, IIIS.
  4. Olcay Yucel Culha & Fatih Ozatay & Gulbin Sahinbeyoglu, 2006. "The Determinants of Sovereign Spreads in Emerging Markets," Working Papers 0604, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  5. Jokipii , Terhi & Lucey, Brian, 2006. "Contagion and interdependence: measuring CEE banking sector co-movements," Research Discussion Papers 15/2006, Bank of Finland.

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