Extreme Interdependence and Extreme Contagion between Emerging Markets

This paper presents a methodology to identify contagion between exchange market pressure events in different countries, based on a set of seemingly unrelated probit equations. This technique allows us to separate the transmission due to broadly defined macroeconomic interdependence, and contagion due to herding, avoiding some of the caveats of the more traditional cross-correlation approach. We find evidence of pure contagion only for a limited number of country pairs which, with few notable exceptions, belong to the same region. In some instances, a reduction in speculative pressure can be identified between countries located in different regions. This evidence seems to suggests that the spreading of crises can be triggered by sudden shifts in investors expectations after an initial crisis episode and that investors tend to discriminate on the basis of location and common macroeconomic weakness or perceived similarity.