Extreme interdependence and extreme contagion between emerging markets

Abstract

This paper uses seemingly unrelated probit techniques to separate the transmission of a crisis due to broadly defined macroeconomic interdependence from contagion due to herding, avoiding some of the caveats of the more traditional cross-correlation approach. We find that pure contagion occurred in a limited number of country pairs generally belonging to the same region. A reduction in speculative pressure can also be identified between countries in different regional blocks. This seems to suggest that after an initial crisis episode, investors tend to discriminate on the basis of location and common macroeconomic weakness or perceived similarity

News and correlations of CEEC-3 financial markets

“…The first approach is related to the Eichengreen et al (1996) definition and consists of investigating whether the likelihood of a crisis in one country depends on local fundamentals, events in another country, or some common factors shared by these countries (e.g., Haile and Pozo, 2008;Fazio, 2007;Eichengreen et al, 1996).…”

“…4 Three of the most important (and agreed upon) channels are the following (see also Didier et al, 2008;Fazio, 2007). First, a financial crisis can be transmitted via trade (Glick and Rose, 1999).…”

“…An important aspect of this channel for emerging markets is that financial investors might treat seemingly similar countries as equal due to a lack of information. Third, similar macroeconomic weaknesses in different countries may imply that all countries will be treated the same if one of them faces a crisis (Fazio, 2007).…”

International propagation of shocks: an evaluation of contagion effects for some Latin American countries

“…The Mexican Tequila effect in 1994, the Asian currency crisis in 1997, the Russian devaluation in 1998, the Brazilian devaluation in 1999 and the Turkish devaluation in 2001; and the way in which those shocks affected other economies have been the centre of research (Eichengreen et al 1996, Agenor et al 1997, Glick and Rose 1998, Kodres and Pritsker 1999, Rigobon 1999, Kaminsky and Reinhart 2000a, 2001, Pritsker 2000, Bazdresch and Werner 2000, Forbes et al 2000, Baig et al 2000, Bordo and Murshid 2000, and Fazio 2007. These studies coincide in that financial contagion is not a global trend.…”

“…In this matter the empirical literature that has included the role played by restrictions to capitals mobility, has not come to a definitive conclusion. For Edwards (1999) and Fazio (2007) the adoption of capital controls policies in the Chilean economy, between 1990s and the end of that decade, avoided the consequences of Asian contagion and some Latin American crises that affected other countries in the region. But other studies, including a broad set of countries (De Gregorio and Valdés (2000) and Kaminsky et al (2001)) and specifically for Colombia (Concha, Galindo and Quevedo, 2008) suggest that capital controls did not stop the appreciation of the domestic currency and the foreign capital inflows in the end of 90's.…”