Graciela Kaminsky

On crises, contagion, and confusion

Abstract Since the Tequila crisis of 1994–1995, the Asian flu of 1997, and the Russian virus of 1998, economists have been busy producing research on the subject of contagion. Yet, few studies have examined empirically through which channels the disturbances are transmitted if there are, indeed, fundamental reasons for the spillovers we observe. We attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals-based contagion. We examine the role of international bank lending, the potential for cross-market hedging, and bilateral and third-party trade in the propagation of crises.

Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization

The authors examine the short- and long-run effects of financial liberalization on capital markets. To do so, they construct a new comprehensive chronology of financial liberalization in 28 developed and emerging economies since 1973. The authors also construct an algorithm to identify booms and busts in stock market prices. The results indicate that financial liberalization is followed by more pronounced boom-bust cycles in the short run. But financial liberalization leads to more stable markets in the long run. Finally, the authors analyze the sequencing of liberalization and institutional reforms to understand the contrasting short- and long-run effects of liberalization.

What Triggers Market Jitters? A Chronicle of the Asian Crisis

In the chaotic financial environment of East Asia in 1997-98, daily changes in stock prices of as much as 10 percent became commonplace. The authors analyze what type of news moved the market in those days of extreme market jitters. They find that movements are triggered by both local and neighbor-country news. News about agreements with international organizations and credit rating agencies have the most weight. Some of those large changes in stock prices, however, cannot be explained by any apparent substantial news but seem to be driven by herd instincts in the market itself. On average, the one-day market rallies are sustained with the largest one-day losses are recovered - suggesting that investors overreact to bad news.

Currency and Banking Crises: The Early Warnings of Distress

The abruptness and virulence of the 1997 Asian crises have led many to claim that these crises are of a new breed and thus they were unforecastable. This paper examines 102 financial crises in 20 countries and concludes that the Asian crises are not of a new variety. Overall, the 1997 Asian crises, as well as previous crises in other regions, occur when the economies are in distress, making the degree of fragility of the economy a useful indicator of future crises. Based on this idea, the paper proposes different composite leading indicators of crises, which are evaluated in terms of accuracy both in-sample and out-of-sample.

Nominal exchange rate regimes and the real exchange rate : Evidence from the United States and Great Britain, 1885-1986

Abstract Two assumptions about the real exchange rate are common in the literature on international finance: (1) the real exchange rate is a random walk, (2) the time series properties of the real exchange rate depend on the nominal exchange rate regime. This paper presents evidence that indicates that the random walk behavior of the real exchange rate is only a characteristic of the post-World War II period. Moreover, our findings also suggest that what is crucial to the real exchange rate behavior is the particular historical period rather than the nominal exchange rate arrangement.

Can a time-varying risk premium explain excess returns in the forward market for foreign exchange?

Abstract We investigate the existence of a time-varying risk premium in the foreign exchange market using the intertemporal asset pricing model. In this model the risk premium is due to consumption risk, which is measured by the covariance between returns and the marginal utility of money. We model this conditional covariance using Engles (1982) ARCH model. Results are presented for three exchange rates for the 1975–1985 period. Although a time-varying risk premium is an important determinant of the expected returns, tests of IAPM restrictions show that a more flexible specification of the model is needed.

Financial markets in times of stress

In this paper, we examine which markets are most synchronized internationally and exhibit the greater extent of comovement. We focus on daily data for four asset markets: bonds, equities, foreign exchange, and domestic money market. Our sample covers thirty-five developed and emerging market countries during 1997-1999. The extent of comovement and responsiveness to external shocks is examined in different ways. To measure the response of these markets to adverse external shocks, we date the peaks in domestic interest rates and bond spreads and the largest daily declines in equity prices and assess the extent of clustering around the same period. We also analyze which markets show evidence of greatest comovement in general, irrespective of whether there are adverse shocks or not.

The debt crisis: Lessons of the 1980s for the 1990s

One of the salient characteristics of the 1980s is the growth collapse of the Latin American debtor countries. The debt-overhang literature claims that the debt crisis is the main reason for the growth collapse. However, previous empirical work has failed to support this hypothesis. We reexamine this hypothesis further using simulation and econometric methods. We find that once we account for the effects of social inequality on government policy and consumption, the burden of servicing the debt becomes an important factor in explaining the collapse in investment and output growth in Latin America. We draw some conclusions for the 1990s.

Efficiency in Commodity Futures Markets

An econometric investigation is undertaken into the efficiency of commodity futures markets. Despite considerable empirical literature, there is no consensus on whether or not the markets are efficient. This study suggests that for certain commodities expected excess returns to futures speculation are nonzero. However, these results do not necessarily imply that agents do not act rationally. The implications for the cost of using the futures market for hedging and for the power of futures prices to forecast future spot prices are also noted.

High real interest rates in the aftermath of disinflation: is it a lack of credibility?

High real interest rates have been observed in many countries for several months after the adoption of disinflation programs. While they may reflect primarily a liquidity crunch, high ex post real interest rates can also be explained in terms of an ex post error in inflation expectations that reflects a lack of credibility of the low-inflation policy. The latter hypothesis is tested using data for Argentina, Israel, and Mexico during the implementation of the stabilization programs in the mid-1980s.