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4 - How Are Shocks Propagated Internationally?

Firm–Level Evidence from the Russian and East Asian Crises

Published online by Cambridge University Press:  04 August 2010

Reuven Glick
Affiliation:
Federal Reserve Bank of San Francisco
Ramon Moreno
Affiliation:
Federal Reserve Bank of San Francisco
Mark M. Spiegel
Affiliation:
Federal Reserve Bank of San Francisco
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Summary

INTRODUCTION

The 1990s were punctuated by a series of currency crises. A striking characteristic of many of these crises is how an initial country–specific shock was rapidly propagated to markets of very different sizes and structures around the globe. A number of studies have developed theories attempting to explain these patterns, and several others have used macroeconomic data to test their validity.

This chapter, however, takes a very different approach to evaluating how shocks are propagated internationally. It utilizes firm–level information, instead of aggregate macro–level data, to evaluate the impact of the East Asian and Russian crises on individual companies' stock market returns. It constructs a new dataset of financial statistics, product information, geographic data, and stock returns for over 14,000 companies in 46 countries. It uses this information to test if firm vulnerability to the East Asian and Russian crises is affected by factors such as: sector of production, global pattern of sales and profitability, debt quantity and structure, trading liquidity, and/or geographic location. Identifying which types of companies were (and were not) most vulnerable to these shocks is not only interesting in and of itself, but also helps assess how these financial crises were transmitted internationally.

The analysis presented in this chapter has many useful implications (in addition to addressing the academic question of how shocks are propagated internationally). For investors seeking to maintain a diversified portfolio, it shows what types of companies are more vulnerable to crises in other regions or markets.

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Publisher: Cambridge University Press
Print publication year: 2001

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