Co-movement of Spreads: Fundamentals or Investor Behavior?

This chapter focuses on co-movement of spreads across different countries, and on the frequency of crises shared by more than one country — contagion. Overall, co-movement of spreads among emerging markets was far higher in the 1990s than during the pre-World War I era. Sharp changes in spreads (or crises, defined in a number of ways) during the 1990s typically affected many countries at the same time, whereas global crises were virtually non-existent in the historical sample. An examination of whether co-movement was driven by common economic fundamentals showed that emerging markets in the past were more different from each other than their counterparts are today: they tended to specialize in a small number of export commodities. Differences in co-movement between the two periods were not driven solely by economic fundamentals, and may be accounted for by differences in investor behavior, particularly the presence of large investment funds today versus many individual investors in the past.