Imperfect Information and Contagion in Capital Markets

Philippe Dupuy ()

Journal of Emerging Market Finance, 2008, vol. 7, issue 2, 103-140

Abstract: In this article, we test the importance of the role played by imperfect information in emerging markets sovereign bonds. We develop a model of secondary market bond spreads that incorporates measures of both risk and ambiguity created by imperfect information. We test it on a large set of emerging markets over a recent period by using bid and ask spreads as a proxy for the level of ambiguity in each market. We find strong evidence that ambiguity is a key element in sovereign spread determination in secondary markets. We also show that the concept of ambiguity is a good candidate for justifying contagion during a crisis. In particular, we are able to discriminate between crises that arose due to a global disturbance on perceived ambiguity from others.

Keywords: Imperfect information; contagion; sovereign debt; spread; ambiguity; JEL Classification: D82; JEL Classification: G14 (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:sae:emffin:v:7:y:2008:i:2:p:103-140

DOI: 10.1177/097265270800700201

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