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

  • Sergio Godoy

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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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. Marcello Pericoli & Massimo Sbracia, 2001. "A Primer on Financial Contagion," Temi di discussione (Economic working papers) 407, Bank of Italy, Economic Research and International Relations Area.
  2. Pettis, Michael, 2001. "The Volatility Machine: Emerging Economies and the Threat of Financial Collapse," OUP Catalogue, Oxford University Press, number 9780195143300, March.
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  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. 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.
  12. 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.
  13. Christian B. Mulder & Brieuc Monfort, 2000. "Using Credit Ratings for Capital Requirementson Lending to Emerging Market Economies; Possible Impact of a New Basel Accord," IMF Working Papers 00/69, International Monetary Fund.
  14. Canova, Fabio, 2003. "The Transmission of US Shocks to Latin America," CEPR Discussion Papers 3963, C.E.P.R. Discussion Papers.
  15. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, March.
  16. 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.
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