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Andrew Sheng

Asia Rising -- explores Asia's role in the world economy, the challenges faced from globalization, the quest for greater regional financial integration, the problem of lagging investment, and why East Asia performed so much better than Latin America. It also looks at the recovery of Japan and the rise of India and China. The economies of the ASEAN-4 come under the microscope in Country Focus. Other articles examine financial sector reform in Africa and the remaining hurdles to financial integration in the European Union. People in Economics profiles Paul Krugman, Back to Basics focuses on hedge funds, and the Straight Talk column looks at the problem of underdevelopment.

Randall Dodd

The June 2008 issue tackles the crisis in financial markets in industrial countries from a number of angles. Articles look at the origins of the crisis in the subprime mortgage market in the United States and track its spillover into other markets. Then authors examine what can be done to prevent future crises. Other articles look at bank capital adequacy rules and Basel II, whether emerging markets and industrial economies are decoupling or converging, capital flows to low-income countries, efforts to achieve the MDGs, and currency intervention. Back to Basics looks at over-the-counter (OTC) markets and the People in Economics column profiles Jacques Polak. Picture This is on the digital divide.

Mr. Subir Lall

Asalient feature of emerging markets has been their susceptibility to sharp spikes in volatility and “contagion” across countries as well as markets during periods of crisis. By the broadest measure, contagion would imply a co-movement in asset prices in excess of what may be explained by macroeconomic fundamentals. Recent credit concerns relating to Argentina and Turkey and the associated rise in market volatility have prompted comparisons of the extent of contagion compared with previous crisis episodes. While there clearly were specific instances of spillover of market volatility arising from particular country credit concerns to other countries, an assessment of how widespread it was needs a more precise measure. One such measure of contagion—the average cross-country correlation of returns—provides an indication of the extent of co-movement of individual country returns and indicates periods of broad-based selling or buying of emerging markets.

EDUARDO LEVY-YEYATI and ANGEL UBIDE

This paper analyzes the behavior of closed-end country fund discounts, including evidence from the Mexican and East Asian crises. It finds that the ratio of fund prices to their fundamental value increases dramatically during a crisis, an anomaly that we denote the “closed-end country fund puzzle.” Our results show that the puzzle relates directly to the fact that international investors are less (more) sensitive to changes in local (global) market conditions than domestic investors. This asymmetry implies that foreign participation in local markets can help dampen the effect of a crisis in asset prices in the originating country, at the cost of amplifying contagion to noncrisis countries. [JEL G1, E3]

Ms. May Y Khamis and Mr. Abdelhak S Senhadji
Departmental papers are usually focused on a specific economic topic, country, or region. They are prepared in a timely way to support the outreach needs of the IMF’s area and functional departments.
Einars Repše

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Jorge A. Chan-Lau, Donald J. Mathieson, and James Y. Yao

Contagion can be defined as the probability of observing large return realizations simultaneously across different financial markets (co-exceedances) rather than as increases in correlations. We introduce global extreme contagion measures constructed from bivariate extremal dependence measures. The measures are used to quantify both negative and positive equity returns contagion at the inter- and intraregional level for a number of mature and emerging equity markets during the past decade. Our results suggest that (a) contagion patterns differ significantly within regions and across regions, with Latin America showing a secular increase in contagion not matched by other regions or countries; (b) contagion is higher for negative returns than for positive returns; (c) only the 1998 Russian and Brazilian crises led to a global increase in contagion; and (d) extremal dependence measures of contagion and simple correlation measures are not highly correlated, with the exception of Latin America, suggesting that the use of correlations as a proxy for contagion may be misleading. [JEL F30, G10, G15, C10]

International Monetary Fund. External Relations Dept.
Asia Rising -- explores Asia's role in the world economy, the challenges faced from globalization, the quest for greater regional financial integration, the problem of lagging investment, and why East Asia performed so much better than Latin America. It also looks at the recovery of Japan and the rise of India and China. The economies of the ASEAN-4 come under the microscope in Country Focus. Other articles examine financial sector reform in Africa and the remaining hurdles to financial integration in the European Union. People in Economics profiles Paul Krugman, Back to Basics focuses on hedge funds, and the Straight Talk column looks at the problem of underdevelopment.
International Monetary Fund

Abstract

The past year has been a remarkable one in the international capital markets as the Asian emerging markets have experienced turbulence unseen since the debt problems of the heavily indebted emerging markets at the beginning of the 1980s.1 Even though the financial crisis has been largely confined to Asia, Japan’s growing economic weaknesses and banking problems have spilled over outside the region and the crisis has produced a reevaluation of the risks and vulnerabilities in emerging markets outside Asia. The mature financial markets in North America and Europe have not thus far been very adversely affected by the crisis because of their generally relatively small and well-provisioned on-balance-sheet banking sector exposures to the Asian emerging markets