Financial Contagion and Investor "Learning": An Empirical Investigation

Ritu Basu

No 2002/218, IMF Working Papers from International Monetary Fund

Abstract: There have been several episodes of financial market "contagion" in the 1990s. Is contagion driven by herd behavior? Does it reflect fundamental economic linkages between countries? Or are episodes of contagion driven by investor learning and risk reassessment about a select group of countries? We pursue these questions by studying the persistence in the spillover of shocks following the bond market developments in Hong Kong SAR in 1997. Our results suggest that this contagion, at least for a few countries, was a consequence of adverse sentiment shifts arising from investor learning and was not merely driven by changes in fundamentals.

Keywords: WP; market; bond market; investor; SAR.; emerging market; Contagion; trader behavior; herding; sunspots; learning; cross-market liquidity risk spillover; cross-market shock transmission; contagion case; global bond market turmoil post; market response; market insolvency; Securities markets; Yield curve; Emerging and frontier financial markets; Monetary base; Real exchange rates; Africa; Global (search for similar items in EconPapers)
Pages: 36
Date: 2002-12-01
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Citations: View citations in EconPapers (19)

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