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Contagion or Interdependence in Emerging Debt Markets?

Iuliana Ismailescu, Hossein Kazemi


This paper examines the evidence of contagion in emerging debt markets during two default episodes: Russia’s 1998 and Argentina’s 2001. We find evidence supporting the presence of contagion in the form of intra and inter-regional spillover of extreme returns. Contrary to previous studies, however, contagion seems to happen at both tails of the returns distribution. Further, the presence of contagion is not limited to the periods of credit crisis, as it also extends into more tranquil periods.  To check the robustness of our results, we apply the correlation approach, which has been used to study contagion in equity and foreign currency markets. Contrary to these studies, our results show that the correlations in credit markets remain relatively stable and do not deviate significantly from their historical levels during periods of crisis. These findings lead us to conclude that there is no contagion in emerging debt markets; only interdependence. The co-movement of emerging debt markets during the crisis periods emanates from these markets’ historical interdependence and is not a consequence of crises’ contagious effects, as it is the case in stock and foreign exchange markets.



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