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Regionality revisited: an examination of the direction of spread of currency crises

Dasgupta, Amil ORCID: 0000-0001-8474-9470, Leon-Gonzalez, Roberto and Shortland, Anja (2011) Regionality revisited: an examination of the direction of spread of currency crises. Journal of International Money and Finance, 30 (5). 831 - 848. ISSN 0261-5606

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Identification Number: 10.1016/j.jimonfin.2011.05.004

Abstract

What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the " ground zero" country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models that allows us to take into account the uncertainty regarding the appropriate set of regressors.We find that institutional similarity to the ground zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the " wake-up call" hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/journal-of-i...
Additional Information: © 2011 Elsevier Ltd
Divisions: Finance
Subjects: H Social Sciences > HG Finance
JEL classification: F - International Economics > F3 - International Finance > F31 - Foreign Exchange
F - International Economics > F3 - International Finance > F32 - Current Account Adjustment; Short-Term Capital Movements
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C11 - Bayesian Analysis
Date Deposited: 30 Jun 2011 10:08
Last Modified: 01 Oct 2024 03:37
URI: http://eprints.lse.ac.uk/id/eprint/37175

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