computed from the International Finance Corporation (IFC) investable US dollar total return index, serve as a basis for this crisis dummy. We use nominal US dollar returns because we are interested in the optimization problem of a foreign investor.<sup>11</sup> When needed, we complement the returns with data from Morgan Stanley Capital International (MSCI) or national sources.<sup>12</sup> With these data on stock market returns, we construct a binary crisis variable in which a month is counted as a crisis month if the total return undershoots its sample mean by more than two standard deviations. After this initial drop, the subsequent months are also counted as crisis months until returns revert to the one standard deviation band around the sample mean.

As noted in the previous sections, we use a rich set of domestic control variables. The mean of growth forecasts, obtained from Consensus Economics, is used to control for the state of the economy, while the volatility of stock market returns is used to disentangle the effect of uncertainty regarding fundamentals from general high variability in the domestic market. Additionally, we use indices of financial, economic, and political risk computed by the International Country Risk Guide (ICRG) to control for potential domestic reasons for changes in uncertainty. In the context of contagion, these indicators were first used by Broner, Gelos, and Reinhart (2006) .

Following Fernandez-Arias (1996) and the extensive literature on “push” and “pull” factors of capital flows into and out of emerging markets, we use the interest rate on 10year US government bonds to control for interest rates in advanced economies, an important external driver of investment decisions in emerging markets.

The key set of control variables that we include relate to alternative channels of contagion. A variety of alternative contagion channels appear to be relevant in the context of stock market drops. Firstly, we control for contagion through common creditors. In line with Van Rijckeghem and Weder (2001), we use consolidated data of BIS banking statistics to construct an index of contagion through the presence of a common creditor. However, we construct a different index from theirs. The index used in this paper reflects the dependence on common creditors as opposed to their measure, which reflects competition for funds. In the context of stock market drops, the dependence on common investors appears more relevant than competition for their funding.<sup>13</sup> Another relevant channel of contagion is trade linkages with the crisis country. Following Glick and Rose (1999), we use bilateral export data from the IMF Direction of Trade Statistics to construct the measure of trade links. However, in contrast to their measure, we use the share of exports to Country _A_ relative to Country _B_ ’s total exports. Finally, we also control for the possibility of contagion through common overexposed fund investments, using the index developed by Broner, Gelos, and Reinhart (2006).

> 11The investable indices take into consideration restrictions on foreign investment. Therefore, this measure represents the part of the national stock markets accessible to foreign investors, which is relevant in the context of contagion.

> 12For more details, please refer, to Table 5 in the Appendix.

> 13For details on the construction of this index, please refer to Table 5 in the Appendix.

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