The IMF Working Papers series is designed to make IMF staff research available to a wide audience. With nearly 300 released each year, working papers cover a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Renee Fry, Vance Martin, Brenda Gonzalez-Hermosillo, and Mardi Dungey
INTERNATIONAL MONETARY FUND
We examine empirically the episode of extraordinary turbulence in global financial markets during 1998. The analysis focuses on the market assessment of credit risk captured by daily movements in bond spreads for twelve countries. A dynamic latent factor model is estimated using indirect inference to quantify the effects of unanticipated shocks across borders or "contagion," controlling for common global shocks, country-specific shocks and regional factors. The results show that there were substantial international contagion effects resulting from both the Russian and LTCM crises. The proportion of volatility explained by contagion is not necessarily larger in developing than in developed nations.