Crisis, Contagion, and Country Funds: Effects on East Asia and Latin America

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Abstract
Spillover effects, from one country or region to the other countries and regions, have attracted renewed attention in the aftermath of the Mexican crisis of December 1994. This paper uses data on closed-end country funds to study how a negative shock in Mexican equities is transmitted to Asia and Latin America, and to particular countries within each region. Country funds allow us to study the transmission to other fund net asset values (NAVs) and prices, which are traded in local stock markets and in New York, respectively. The evidence indicates that shocks such as the Mexican crisis produce spillover effects which are less strong in Asia than in Latin America. The shocks seem to affect Latin American NAVs directly, while the transmission to Asian NAVs appears to "pass through" the New York investor fund community, rather than directly from equity prices in Latin America to equity prices in Asia. Even though the data show that co-movements are stronger within each regional market =96 East Asia, Latin America, New York =96 than between them, investors do treat different countries differently. Shocks such as the Mexican 1994 crisis seem to have a stronger impact in countries with weak fundamentals. A high debt/export ratio makes the Philippines vulnerable, for example, despite its location in East Asia, while a low debt/export ratio makes Chile relative less vulnerable, despite its location in South America.

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