Like epidemics, financial crises tend to spread. Witness the 1997 Asian crisis, which quickly engulfed South Africa, Eastern Europe and even Brazil. Many economists have argued that financial institutions sometimes panic, disregard fundamentals and thus spread a crisis even to countries with strong fundamentals. Individual investors, too, can contribute to a crisis by selling mutual funds, forcing fund managers to sell when the fundamentals do not warrant that action.
A recent study considered the contagion-trading phenomenon by studying the behaviour of U.S. international mutual funds focused in emerging markets. Among the author’s findings:
Source: Lucille Maistros, How Financial Crises Spread, NBER Digest, January 2001; based on Graciela Kaminsky, Richard Lyons and Sergio Schmukler, Managers, Investors, and Crisis: Mutual Fund Strategies in Emerging Markets, NBER Working Paper No. 7855, August 2000, National Bureau of Economic Research.
For NBER Digest article http://www.nber.org/digest/jan01/w7855.html
For more on Stock Markets http://www.ncpa.org/iss/eco/
FMF Policy Bulletin\8 January 2002
