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Sources of Contagion: Finance or Trade? Caroline Van Rijckeghem

Sources of Contagion: Finance or Trade?

Caroline Van Rijckeghem

Published May 9th 2014
ISBN : 9781282110090
ebook
58 pages
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 About the Book 

Contagion in the wake of the Russian crisis has pointed to the role of investors portfolios in accentuating and transmitting financial crises from country to country. While a good case could be made that contagion following a number of earlier crisesMoreContagion in the wake of the Russian crisis has pointed to the role of investors portfolios in accentuating and transmitting financial crises from country to country. While a good case could be made that contagion following a number of earlier crises was related to trade (Glick and Rose, 1999), such an argument does not easily carry over to the case of Russia. Indeed, many observers have noted the insignificance of Russia as a destination for exports or as a trade competitor in third nations. Observers have rather pointed to two types of financial market linkages to explain contagion following the Russian crisis: (1) an enhanced perception of risks in emerging markets and/or an increase in risk aversion by investors- and (2) the need to restore capital adequacy ratios, which were dented by losses in Russia, meet margin calls, and/or to rebalance portfolios to contain value at risk. The second type of explanation points to the importance of liquidity as opposed to a country s macroeconomic fundamentals in the pricing of emerging market assets. By the same token, it suggests that investors portfolios, rather than characteristics of countries, can help explain the pattern of contagion.