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Imperfect Information and Contagion in Capital Markets

Author

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  • Philippe Dupuy

    (Philippe Dupuy, Ph D., Multi-Asset Fund Manager. I am grateful to Jyoti Gupta, Joël Metais, André Orléan and John Simpson for useful comments and suggestions. I am also indebted to Regis Chatellier for technical help. E-mail: Philippe.dupuy@cegetel.net)

Abstract

In this article, we test the importance of the role played by imperfect information in emerging markets sovereign bonds. We develop a model of secondary market bond spreads that incorporates measures of both risk and ambiguity created by imperfect information. We test it on a large set of emerging markets over a recent period by using bid and ask spreads as a proxy for the level of ambiguity in each market. We find strong evidence that ambiguity is a key element in sovereign spread determination in secondary markets. We also show that the concept of ambiguity is a good candidate for justifying contagion during a crisis. In particular, we are able to discriminate between crises that arose due to a global disturbance on perceived ambiguity from others.

Suggested Citation

  • Philippe Dupuy, 2008. "Imperfect Information and Contagion in Capital Markets," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(2), pages 103-140, August.
    • Handle: RePEc:sae:emffin:v:7:y:2008:i:2:p:103-140
    DOI: 10.1177/097265270800700201
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    References listed on IDEAS

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    Cited by:

    1. Bappaditya Mukhopadhyay, 2009. "Financial Market Integration," Review of Market Integration, India Development Foundation, vol. 1(1), pages 37-60, April.

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    More about this item

    Keywords

    Imperfect information; contagion; sovereign debt; spread; ambiguity; JEL Classification: D82; JEL Classification: G14;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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