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Emerging Markets in an Anxious Global Economy

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Abstract

We provide a theory of pricing for emerging asset classes, like emerging markets, that are not yet mature enough to be attractive to the general public. Our model provides an explanation for the volatile access of emerging economies to international financial markets and for several stylized facts we identify in the data during the 1990's. We present a general equilibrium model with incomplete markets and endogenous collateral and an extension encompassing adverse selection. We show that contagion, flight to liquidity and issuance rationing can occur in equilibrium during what we call global anxious times.

Suggested Citation

  • Ana Fostel & John Geanakoplos, 2008. "Emerging Markets in an Anxious Global Economy," Cowles Foundation Discussion Papers 1646, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1646
    Note: CFP 1233.
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    18. Guillermo A. Calvo & Enrique G. Mendoza, 2000. "Contagion, Globalization, and the Volatility of Capital Flows," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 15-41, National Bureau of Economic Research, Inc.
    19. Alberto Bisin & Piero Gottardi, 2006. "Efficient Competitive Equilibria with Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 485-516, June.
    20. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
    21. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
    22. Pradeep Dubey & John Geanakoplos, 2002. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1529-1570.
    23. Rodrigo Valdés P. & Kevin Cowan L. & Sebastián Edwards F., 2007. "Current Account and External Financing," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 10(3), pages 5-18, December.
    24. Alfaro, Laura & Kanczuk, Fabio, 2005. "Sovereign debt as a contingent claim: a quantitative approach," Journal of International Economics, Elsevier, vol. 65(2), pages 297-314, March.
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    27. Guillermo A. Calvo, 1998. "CAPITAL FLOWS AND CAPITAL-MARKET CRISES: The Simple Economics of Sudden Stops," Journal of Applied Economics, Taylor & Francis Journals, vol. 1(1), pages 35-54, November.
    28. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:

    1. Broer, Tobias & Kero, Afroditi, 2021. "Collateralization and asset price bubbles when investors disagree about risk," Journal of Banking & Finance, Elsevier, vol. 128(C).
    2. J. Doyne Farmer & John Geanakoplos, 2008. "The virtues and vices of equilibrium and the future of financial economics," Papers 0803.2996, arXiv.org.

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    More about this item

    Keywords

    Margin; Leverage cycle; Liquidity preference; Collateral value; Informational volatility; Contagion; Portfolio effect; Flight to liquidity; Asymmetric information; Issuance rationing; Anxious economy; Emerging markets; High yield; Market closures;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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