Flight to Quality: Investor Risk Tolerance and the Spread of Emerging Market Crises
The financial crises of the 1990s have raised new concerns about the operation of international financial markets. Prominent among these are worries about sharp changes in investor sentiment and their cross-border repercussions. The Mexican crisis dramatically altered investor sentiment toward emerging markets and echoed through Latin America, showing up in Argentina as the Tequila Effect. The spillover from the Thai crisis was limited initially to the Asian Tigers, but by the end of 1997 a wide variety of other developing countries were affected to some degree. In addition, Russia’s default in the summer of 1998, in conjunction with the all-but-failure of Long-Term Capital Management, precipitated a flight to quality with a strong negative impact on market sentiment regarding the entire population of emerging-market borrowers.
KeywordsEurope Covariance Malaysia Argentina Volatility
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