the impact of uncertainty shocks in emerging economies abstract a recent strand of research proposes that sudden jumps in uncertainty generate rapid drops and recoveries in real macroeconomic variables that drive the business cycle using an empirical model we find substantial heterogeneity in reactions to these shocks across countries in comparison to the u s and other developed countries emerging economies suffer much more severe falls in investment and private consumption following an exogenous uncertainty shock take significantly longer to recover and do not experience a subsequent overshoot in activity we provide evidence that the dynamics of investment and consumption are correlated with the depth of financial markets we control for the potential role of a credit channel and estimate that it can account for up to one half of the increased fall in investment generated by uncertainty shocks among emerging economies with less developed financial markets in this context monetary and fiscal policy actions that alleviate the impact of credit constraints facing firms may reduce the impact of uncertainty shocks in these economies

contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

detecting shift contagion in currency and bond markets abstract this paper investigates why financial market crises often increase the interdependence between assets associated with different countries two sources of increased co movement in asset returns are considered i larger common shocks operating through standard cross country linkages and ii changes in the structural transmission of shocks across countries referred to as shift contagion to examine this issue we develop a method for detecting shift contagion with three notable features first parameters corresponding to the structural transmission of shocks across countries are identified in the presence of changing volatility regimes for the shocks second the timing of changes in volatility is endogenously estimated instead of being exogenously assigned third the countries in which crises originate need not be known or even included in the analysis we apply the method to currency returns for developed countries and bond returns for emerging market countries

balance of payment crises in emerging markets how early were the early warning signals although many papers have already proposed empirical models of currency crises the timing of such crises has received relatively little attention so far most papers use indeed a static specification and impose the same lag structure across all explanatory variables this by construction prevents from specifically timing the crisis signals sent by the leading indicators the objective here is to fill this gap by considering a set of dynamic discrete choice models the first contribution is to identify how early in advance each explanatory variable sends a warning signal some indicators are found to signal a crisis in the very short run while others signal a crisis at more distant horizons the second contribution is to show that state dependence matters albeit mostly in the short run the results have important implications for crisis prevention in terms of the timeliness and usefulness of the envisaged policy response

bilateral portfolio dynamics during the global financial crisis abstract there has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis for a given destination investors from different countries adjusted their holdings to different degrees we show that the size of the initial bilateral holding geographical distance common language the level of trade and common institutional linkages help to explain the pattern of adjustment these bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

capital markets and the exchange rate with special reference to the dollarization debate in latin america the paper reviews the main challenges faced by policymakers in emerging market economies em in light of recent financial crises and taking into account salient factors like the existence of partial dollarization imperfect credibility weak financial systems and contagion the standard theory of optimal currency areas is discussed and criticized for omitting the above factors when these factors are taken into account an extreme foreign exchange regime like dollarization is shown to become much more attractive the paper discusses the pros and cons of dollarization and among other things shows that the lack of a lender of last resort is not necessarily a major drawback in em the paper also discusses inflation targeting it in a formal model it is shown that it could be subject to credibility problems similar to those found in exchange rate based stabilization programs

conversation information and herd behavior experimental evidence shows that an important reason why people tend to imitate others to exhibit herd behavior is that they assume that the others have information that justifies their actions the information cascade models of banerjee 1992 and bikhchandani et al 1992 are significant developments in showing some general equilibrium and welfare effects of such rational imitative behavior but these models as specified may be of limited applicability since they assert that differences across groups in herd behavior can be attributed to the random decisions of first movers differences across groups in herd behavior might be explained more often in terms of different modes of interpersonal information transmission patterns of human conversation imply great selectivity to the kinds of information transmitted within groups this abstract was borrowed from another version of this item

international financial contagion in currency crises abstract this paper examines the role of financial linkages especially through a common creditor in the propagation of emerging market crises during the 1990s using panel probit regressions on 41 emerging market countries it finds that financial linkages played a significant role in the spread of the mexican asian and russian crises the significance of financial linkages emerges after controlling for the role of domestic and external fundamentals trade spillovers and financial weaknesses in the affected countries a strong financial linkage to the crisis country of origin not only substantially raises the probability of contagion but also helps to explain the observed regional concentration of currency crises

financial contagion and attention allocation this paper explains financial contagion between two stock markets with uncorrelated fundamentals by fluctuations in international investors attention allocation we model the process of attention allocation that underlies portfolio investment in international markets using investors who face information processing constraints investors optimally allocate more attention to a region hit by a financial crisis to the detriment of other markets the resulting endogenous increase in uncertainty causes a reduction in the capacity to bear risks by international investors that induces them to liquidate their positions in all risky assets hence there is a collapse in stock prices around the world we show that the degree of non anticipation of a crisis is crucial for the existence of contagion using data from the east asian crisis and the number of news stories about thailand in the financial times relative to news stories about argentina brazil and chile as a proxy for the relative attention allocated to the asian stock market we find evidence consistent with two key predictions of our model first the higher the volatility of the originator market the more relative attention allocated to this market and second the more relative attention allocated to the originator market the higher the volatility of the other markets our findings support the attention reallocation channel as a transmission mechanism of financial crises between regions during the period from january 1997 to july 1998

does deposit insurance stimulate capital inflows abstract we empirically investigate the relationship between explicit deposit insurance and private capital inflows to developing countries during the 1990s the results do not indicate a significant relationship between explicit deposit insurance and the scale of capital inflows

financial globalisation and crisis institutional transformation and equity this paper comprises the long introduction to the symposium of five papers on financial globalisation published in the cambridge journal of economics volume 34 no 2 the paper discusses the impact of financial globalisation in a variety of spheres and shows how the five papers link together to provide a coherent view of the current economic and financial crisis in this paper we also examine the globalisation of finance more broadly both in historical terms as well as in relation to the current widespread failure in the financial markets we take up the policy question of how the interests of the poor in particular and developing countries in general could be safeguarded from the vagaries of financial globalisation questioning how much choice communities and countries have and what can the international community do to extend these choices

trade integration and business cycle convergence is the relation robust across time and space in this paper we investigate the relationship between trade intensity and the business cycle correlation using a panel data set taken from 24 countries over the period 1959 2003 most previous studies did not account for the possibility that the business cycle correlation may be influenced by unobservable country pair specific effects our estimates using both fixed and random effects methodologies suggest that trade intensity and the business cycle correlation are positively related to one another however detailed investigation shows that this relationship exists mainly for the european countries

unravelling financial market linkages during crises an empirical model of multiple asset classes across countries is formulated in a latent factor framework a special feature of the model is that financial market linkages during periods of financial crises including spillover and contagion effects are formally specified the model also captures a range of common factors including global shocks country and market shocks and idiosyncratic shocks the framework is applied to modelling linkages between currency and equity markets during the east asian financial crisis of 1997 98 the results provide strong evidence that cross market links are important spillovers have a relatively larger effect on volatility than contagion but both are statistically significant

are foreign institutional investors good for emerging markets in den 1990er jahren waren die portfolio flows institutioneller investoren die dynamischsten kapitalstrome in die emerging markets in dieser arbeit leiten wir in einem rahmen asymmetrischer information funf aussagen ab stellen diese in einen zusammenhang mit der existierenden empirischen literatur und entwickeln daraus entsprechende wirtschaftspolitische implikationen die undurchsichtige informationslage auf den emerging markets behindert vor allem auslandische marktteilnehmer daruber hinaus konnen institutionelle investoren in folge finanzwirtschaftlicher offnung die position lokaler investoren unabsichtlich durch unausgewogene diversifikation und undurchsichtige risiken verschlechtern schlieslich verstarken institutionelle investoren aus dem ausland oft investitionsbooms oder finanzielle ansteckung deshalb sollten kapitalverkehrs und finanzielle liberalisierung stets von sorgfaltiger regulierung begleitet werden

mexico s balance of payments crisis a chronicle of a death foretold this paper claims that the roots of mexico s balance of payments crisis are found in the prevailing high degree of capital mobility and financial globalization under these circumstances shifts in foreign capital flows and anticipation of a banking system bailout may produce large imbalances between stocks of financial assets and foreign reserves threatening the sustainability of currency pegs econometric analysis suggests that half of mexico s reserve losses could be accounted for by these phenomena large financial imbalances are also fertile ground for self fulfilling prophesy crises which lead devaluations to produce deep recessions these difficulties can be partly remedied by appropriate policies

a race to the bottom employment protection and foreign direct investment a common critique of globalization is that it leads to a race to the bottom specifically it is assumed that multinationals invest in countries with lower regulatory standards and that countries competitively undercut each other s standards in order to attract foreign capital this paper tests this hypothesis and finds robust empirical support for both predictions first a reduction in employment protection rules leads to an increase in foreign direct investment fdi furthermore changes in employment protection legislation have a larger impact on the relatively mobile types of fdi second there is evidence that countries are competitively undercutting each other s labor market standards

terms of trade uncertainty and economic growth abstract this paper examines a stochastic endogenous growth model in which terms of trade uncertainty affects savings and growth the model explains the well known positive link between growth and the mean rate of change of terms of trade and predicts also that terms of trade variability affects growth increased terms of trade variability results in faster or slower growth depending on the degree of risk aversion but in either case it reduces social welfare these growth effects imply that welfare costs of macroeconomic uncertainty are much larger than first thought cross country panel regressions provide strong support for the model s key predictions

modeling financial contagion using mutually exciting jump processes we propose a model to capture the dynamics of asset returns with periods of crises that are characterized by contagion in the model a jump in one region of the world increases the intensity of jumps both in the same region self excitation as well as in other regions cross excitation generating episodes of highly clustered jumps across world markets that mimic the observed features of the data we develop and implement moment based estimation and testing procedures for this model the estimates provide evidence of self excitation both in the us and the other world markets and of asymmetric cross excitation with the us market typically having more influence on the jump intensity of other markets than the reverse we propose filtered values of the jump intensities as a measure of market stress and examine their out of sample forecasting abilities

dynamic correlation analysis of financial contagion evidence from asian markets we apply a dynamic conditional correlation model to nine asian daily stock return data series from 1990 to 2003 the empirical evidence confirms a contagion effect by analyzing the correlation coefficient series we identify two phases of the asian crisis the first shows an increase in correlation contagion the second shows a continued high correlation herding statistical analysis of the correlation coefficients also finds a shift in variance during the crisis period casting doubt on the benefit of international portfolio diversification evidence shows that international sovereign credit rating agencies play a significant role in shaping the structure of dynamic correlations in the asian markets

does culture influence asset managers views and behavior abstract this research enters new ground by presenting comparative survey evidence on asset managers views and behavior in the united states germany japan and thailand relying on hofstede s four cultural dimensions we find that cultural differences are most helpful in understanding country differences which cannot be explained by pure economic reasoning in short controlling for various determinants the dimension of more individualism predicts less herding behavior more power distance leads to older and comparatively less experienced managers in the upper hierarchy masculinity brings men into top positions and to higher volumes of assets under personal responsibility and uncertainty avoidance is related to higher safety margins against the tracking error allowed and relatively more research effort these consequences i e the culturally different importance of herding age experience gender tracking error and research effort clearly affect investment behavior although in a complex way

a year of living dangerously the management of the financial crisis in 2008 there are many reasons to regret the decision of u s financial authorities to insert the government into the resolution of the investment bank bear stearns in march 2008 the federal reserve s use of its discount window built up false hope of future rescues paying off the uninsured creditors of bear stearns overcompensated them at the time and invited speculative attacks on the equity of similarly situated firms i will argue that the market seizure after lehman brothers decision to seek the protection of bankruptcy was an echo of the prior official decision to protect bear stearns

sudden stops financial frictions and the banking sector abstract financial crises typically feature a large fall in total factor productivity tfp in emerging economies about 40 of domestic credit is provided by banks theories have largely focused on how exogenous changes in domestic interest rates impact the economy in this paper i explore the role of banks intermediation in exacerbating allocative inefficiency i build a small open economy model in which banks are the only domestic agents with access to international capital markets during sudden stops a shock to the world interest rate decreases banks credit supply and raises the domestic interest rate on loans firms with working capital financing needs experience an increase in the cost of production this worsens the misallocation and generates an endogenous fall in tfp and output the model is calibrated to mexico before the 1995 crisis the model predicts a 6 9 fall in tfp and a 5 fall in investment to gdp ratio which closely matches the effects observed in the data

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

do investors herd in emerging stock markets evidence from the taiwanese market abstract this paper has three main contributions to the literature on investor herds first it extends investor herding studies to an emerging yet relatively sophisticated taiwanese stock market at the sector level by using firm level data second it employs different methodologies designed to test the existence of investor herds to better understand the sources of herd behavior third it discusses the implications of different herding measures for investors exposed to systematic and unsystematic risks we find that the linear model based on the cross sectional standard deviation cssd testing methodology yields no significant evidence of herding however the non linear model proposed by chang et al 2000 and the state space based models of hwang and salmon 2004 lead to consistent results indicating strong evidence of herd formation in all sectors we also find that the herding effect is more prominent during periods of market losses our results suggest limited diversification opportunities for investors in this market especially during periods of market losses when diversification is most needed further research is necessary to see whether similar findings hold for other emerging markets

speculative attacks in a two peg model abstract we present a two country model of speculative attacks where the two countries peg their currency to the u s dollar and a continuum of investors can either attack or defend one or the two pegs the main objective of the paper is to show how extending a single peg model of speculative attacks with the presence of a second country pegging its currency changes the range of parameters for which a currency is attacked the model suggests that the presence of another country fixing its exchange rate changes dramatically the range of parameters for which a currency is attacked or defended for example the model indicates that a peg with a relatively high probability of collapse could survive if the other peg is not very likely to be abandoned so investors prefer instead to defend the second peg finally under complete information when the level of fundamentals in both economies is neither weak nor strong the stronger peg may collapse while the weaker peg may survive so in principle any peg could be successfully attacked

banks and liquidity crises in emerging market economies abstract this paper presents and analyzes a simple banking model in which banks have access to international capital markets and domestic asset markets the model generates two types of equilibria a no default equilibrium and a mixed equilibrium in the no default equilibrium all banks are symmetric and always solvent while in the mixed equilibrium some banks can be internationally illiquid and default simultaneously the latter equilibrium captures the basic features of banking crises after financial liberalization in emerging market economies in this case a large capital inflow leads to high asset price volatility and magnifies a banking crisis

when in peril retrench testing the portfolio channel of contagion abstract the impact of past gains and losses on international investors risk aversion is an important factor in the propagation of financial shocks across countries we first present a stylized model illustrating how changes in investors risk aversion affect portfolio decisions and stock prices we then examine empirically the behavior of international mutual funds when funds returns are below average they reduce their exposure to countries in which they were overweight and vice versa an index of financial interdependence that reflects the extent to which countries share overexposed funds helps explain the pattern of stock market comovement across countries and the pattern of contagion during crises

a theory of capital controls as dynamic terms of trade manipulation we develop a theory of capital controls as dynamic terms of trade manipulation we study an infinite horizon endowment economy with two countries one country chooses taxes on international capital flows in order to maximize the welfare of its representative agent while the other country is passive we show that a country growing faster than the rest of the world has incentives to promote domestic savings by taxing capital inflows or subsidizing capital outflows although our theory of capital controls emphasizes interest rate manipulation the pattern of borrowing and lending per se is irrelevant

alternative models of managerial behavior empirical tests for the petroleum industry explanations for takeovers often focus on managerial inefficiency as an explanation this paper utilizes panel data for a set of petroleum firms to test two competing hypotheses about managerial inefficiency the heterogeneous managerial model versus the free cash flow variant of agency theory by focusing on specific investment categories like exploration bidding and leasing activity and r 50d the effects of changes in management and cash flow are better isolated the empirical results provide considerable support for the free cash flow variant of agency theory showing that reduced cash flow due to restructuring will curtail investments in exploration bidding and leasing activity and r 50d copyright 1989 by mit press

global banks and crisis transmission abstract we study the effect of financial integration through banks on the transmission of international business cycles in a sample of 18 20 developed countries between 1978 and 2009 we find that in periods without financial crises increases in bilateral banking linkages are associated with more divergent output cycles this relation is significantly weaker during financial turmoil periods suggesting that financial crises induce co movement among more financially integrated countries we also show that countries with stronger direct and indirect financial ties to the u s experienced more synchronized cycles with the u s during the recent 2007 2009 crisis we then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity the model suggests that the relation between integration and synchronization depends on the type of shocks hitting the world economy and that shocks to global banks played an important role in triggering and spreading the 2007 2009 crisis

contagion in latin america definitions measurement and policy implications this paper analyzes bond and stock markets in latin america and uses these patterns to investigate whether contagion occurred in the 1990 s it defines shift contagion as a significant increase in cross market linkages after a shock to one country or region several coin toss examples and a simple model show that the standard tests for contagion are biased due to the presence of heteroscedasticity endogeneity and omitted variable bias recent empirical work which addresses these problems finds little evidence of shift contagion during a range of crisis periods instead this work argues that many countries are highly interdependent in all states of the world and the strong cross country linkages which exist after a crisis are not significantly different than those during more stable periods these findings have a number of implications for latin america

some contagion some interdependence more pitfalls in tests of financial contagion this paper develops a test of contagion in financial markets based on bivariate correlation analysis which generalizes existing tests and applies it to the international effects of the hong kong stock market crisis of october 1997 contagion is defined as a structural break in the international transmission of financial shocks for plausible values of the variance of country specific shocks in hong kong our test finds evidence of contagion for 5 countries out of a sample of 17 this is in sharp contrast with the findings of recent literature according to which there is no contagion only interdependence we show that this strong result in the literature is due to arbitrary and unrealistic restrictions on the variance of country specific shocks

the falsification of four popular hypotheses about the asian crisis various claims have been made about the causes of the asian crisis and its spread here we use data on the behaviour of capital flows during the crisis to test the strong forms of four such hypotheses that portfolio investors and hedge funds played a dominant role in initiating and or spreading the crisis that moral hazard kept efficient markets from predicting the crisis and finally the common lender hypothesis of kaminsky and reinhart in the process we also test implications of the calvo mendoza model of rational investor ignorance all are falsified as monocausal explanations for example portfolio investments that could not have been subject to substantial moral hazard continued to flow into asia until very shortly before the crisis likewise banks were a much larger source of capital outflows during the crisis than were portfolio investors while falsified in their strongest forms several of these hypotheses in less strong forms should play a role in a more nuanced analysis it is necessary to move past simple single factor approaches in order to produce a more complete synthetic explanation of this episode

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

disparate information and the probability of currency crises empirical evidence abstract this paper tests the impact of the distribution of information on the probability of currency crises within a markov switching framework less disparate information among domestic and foreign investors proxied by premia on country funds lowers the probability of a crisis

are asset price guarantees useful for preventing sudden stops a quantitative investigation of the globalization hazard moral hazard tradeoff abstract an implication of the globalization hazard hypothesis is that sudden stops caused by global financial frictions could be prevented by offering foreign investors price guarantees on emerging markets assets these guarantees create a tradeoff however because they weaken globalization hazard while creating international moral hazard we study this tradeoff using a quantitative equilibrium asset pricing model without guarantees margin calls and trading costs cause sudden stops driven by a fisherian deflation price guarantees prevent this deflation by propping up foreign demand for assets the effectiveness of price guarantees their distortions on asset markets and their welfare implications depend critically on whether the guarantees are contingent on debt levels and on the price elasticity of foreign demand for domestic assets

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration