Systemic Risk in Emerging Markets Financial Systems

Abstract: This paper gives an overview of the concept of systemic risk in emerging markets, focusing from the risks arising when companies raise capital internationally. When companies become active on the international arena and especially in emerging markets, more considerations have to be taken into account before a sound investment decision can be made. Recent crises in Mexico, Asia and Russia have shown that financial turmoil can spread between markets and create substantial jitters. The paper surveys the existing literature regarding systemic risk events in the above mentioned crises. The conclusions are that spillover effects have been present in all crises. The latter part of the paper consists of a correlation exercise between Argentina and 11 other emerging markets during the period of turmoil in Argentina in 2001. The conclusion is that minor contagious events can be traced from the Argentine crisis to the selected emerging markets. Some co-movements during the first half of 2001 can be interpreted as spillover effects, while the latter part of 2001 show muted effects, probably as a result of that investors and analysts differentiated between Argentina and other emerging markets during this period.