# 4.2 Matching the Model to the Data

The reduced form of equation (14) allows us to use our data to set the parameters βs so that the covariance of the returns in the model are equal to the covariances of returns in the data sample. In order, to get the βs from the data, we need to construct the analog of the assets in our model using the data. The following paragraph briefly presents the data and describes how we match the model to the data.

We use a unique firm-level dataset we constructed by individually matching parent stocks to ADRs<sup>11</sup> and cross-listed stocks using Bloomberg and the International Finance Corporation Emerging Market Database (IFC EMDB). Overall, we have weekly data from 01/14/1994 to 12/30/2000 on 344 stocks from Chile, Mexico, and Brazil. The data includes price as well as ADRs programs effective dates in a U.S. exchange (if any) for each stock in our sample. Hence we are able for each stock to determine whether its issuing firm has or has not issued and American Depository Receipts (ADR) or listed in the NYSE before the Brazilian crisis<sup>12</sup> . With that information, we are able to distinguish international stocks from pure domestic stocks before the crisis. We construct for each country, Brazil, Chile, and Mexico an international index based on a portfolio of equally weighted international stocks and a domestic index based on portfolio of equally weighted pure domestic stocks. We also use the Morgan Stanley Capital Index ( MSCI World Index) as a proxy for the world common factor, and the S&P500 index as a proxy of the pure domestic stock in the U.S. Hence, the returns of asset 0 from the developed country in our model are represented by the sample returns of the S&P500 index, the returns of the common factor in our model are represented by the returns of the MSCI World Index from the data.

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Moreover, Brazil represents emerging market 1 (and the crisis country too). The returns of the international asset in Brazil, asset 01 are represented in the data by the sample returns of the international index that we constructed using stocks of Brazilian firms that issued ADRs or cross-listed in the U.S. before the crisis. The returns of the pure domestic asset in Brazil, asset 1 are represented by the sample returns of the domestic index that we constructed with stocks of firms in Brazil that did not issue American Depository Receipts (ADR) or list in the U.S. prior to the Brazilian crisis. Emerging market 2, is either Mexico or Chile and the international asset 02 can be similarly obtained in our our sample using the index of Mexican or Chilean firms that issued American Depository Receipts (ADR) or listed in the U.S. prior to The Brazilian crisis. The pure domestic

> 11 For each ADR traded in a foreign exchange, there is an underlying domestic stock from the same company that is traded in the domestic stock. The ADR is redeemable for a given number of shares of the parent stock. Therefore, we consider for the "international stock" , the parent stock of the ADR, which is traded in the domestic market. And the firm that issues and ADR is considered an international

> 12 We use for the cut date for the Brazilian crisis December 1998.

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