34 ii) _comovements were stronger during the high volatility period of the Mexican crisis; in particular, in our casestudy on Mexico and Poland, we do not reject the null of cointegration for the period July 94-July 95, but we do reject the nullfor the period July 95-July 96._ iii) _the crisis has had a strong permanent effect on the risk assessment on Mexico (550 bs. pts. circa);_ _iv) different Brady bonds responded differently to the Mexican crisis: countries with similar pre-crisis mean and volatility reacted in a similar way (in terms of both absolute deviation and degree of comovement with the Mexican bonds). Other factors (regions, oil producers, date of Brady deal) do not explain the observed patterns._ _v) there was convergence of volatility during the high volatility period of the Mexican crisis._ These results suggest that traders' behavior when assessing sovereign risk of Brady countries is not constant over time and that it responds to the level of uncertainty in the market. Herd behavior increases with risk, leading to even higher volatility.<sup>3 5</sup> Traders have limited information on developing countries, therefore _learning spillovers_ are likely. The joint effect of these two forces can be powerful, as the example of Poland suggests.

The main policy implication of this paper is that _systemic risk_ in the market for developing countries external debt has not completely disappeared. While excess volatility is intrinsic to financial markets when there is herd behavior, comovements are the consequence of poor information only. However, the reaction of the Brady bond market to the Mexican crisis and its aftermath proved its liquidity.<sup>3 6</sup> To conclude, the decrease in sovereign risk premium comovements in the second period of our sample could be due to the fact that _markets are learning,_ i.e. acquiring experience and gathering information on the developing countries, so that learning spillovers are less relevant; but it could also signal the absence of any relevant shock to generate such spillover effects, while in fact the market is still vulnerable to country-specific shocks. On this issue further research is needed. 37

**_35_** An interesting possibility for future research is to look at data on portfolio holdings to see whether there is a convergence in the allocation of funds during periods of high volatility.

**36** "It was the middle of October 1991 that the market received the sudden shock that the price rises of the previous 18 months were not immune to gravity. [...] massive selling of Brazilian paper one Friday morning, inspired by JPMorgan in NY, while a massive coup for the bank, left a number of financial institution reeling. Within three weeks the debt was trading at 22% of face value, and managed to bring down prices across the board. 'What upset the market is that some traders would not come to the phone, and if they did, the prices were wholly unrealistic', says Russell Hanlon, vice president at Chartered WestLB in NY." by Rupert Wright, Trade Finance September 1992 (page 64). But in 1995, after the Mexican crisis: "'One thing is that this market demonstrated its resiliency and liquidity. The worst scenario would have been an illiquid market, but people who wanted to sell could', said Michael Chamberlin, executive director of the Emerging Markets Traders Association." by Paul Kilby, Latin Finance N. 70 (page 34).

**37** There is a recent growing literature on exchange rate correlations that analyses to what extent such correlations are explained by a set of fundamentals (for example B. Eichengreen, A.K. Rose and C. Wyplosz (1996), J. Sachs, A. Tomell and A. Velasco (1996)). Having a longer time serie spanning well beyond the period of the Mexican crisis, it would be extremely interesting to do a similar exercise on the sovereign risk premium: regressing cross-country risk premium correlations on a set of fundamentals would let us assess how much of these correlations is explained by _observablefundamentals._