Please use this identifier to cite or link to this item: http://buratest.brunel.ac.uk/handle/2438/1150
Title: Regionality revisited: An examination of the direction of spread of currency crises
Authors: Dasgupta, A
Leon-Gonzalez, R
Shortland, A
Keywords: Financial contagion; Currency crises; Governance; Bayesian Model Averaging
Issue Date: 2006
Publisher: Elsevier
Citation: Revised for the Journal of International Money and Finance; www.elsevier.com/locate/inca/30443
Abstract: What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the “ground-zero” country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models which allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground-zero country, as measured by qualityof- governance indicators, plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favor of the “wake up call” hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods and may be sensitive to the specification of the prior.
URI: http://bura.brunel.ac.uk/handle/2438/1150
Appears in Collections:Economics and Finance
Dept of Economics and Finance Research Papers

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