Lili Zhu and Jiawen Yang INTRODUCTION The international financial system went through an unusual period between 1994 and 2002. During the eight-year period, the world witnessed a series of financial crises in emerging markets such as the Latin American tequila crises in 1994–95, the Asian financial crisis in 1997–98, the Russian debt crisis in 1998, the Brazilian currency devaluation in 1999, and eventually the financial turmoil occurred in Turkey, Argentina and Uruguay between 2000 and 2002. Some consider 1994–2002 a period of ‘eight-year crisis’ and the above-mentioned episodes are just different stages of a mega-crisis (Taylor, 2007). One focal point in economic and financial research on the eight years of crises is the transmission of the financial turmoil across countries/economies – a phenomenon called ‘contagion.’ However, there is no consensus on the definition of contagion, the channels through which shocks are accentuated and transmitted, or what determines the degree of contagion. For the definition of contagion, Masson (1998) first distinguishes between ‘fundamentals-based contagion’ and ‘true contagion’ or ‘pure contagion.’ As for the channels of contagion, there are financial channels related with the activities of banks, mutual funds, pension funds and insurance companies, and so on, and trade channels (Kaminsky and Reinhart, 2000; Rijckeghem and Weder, 2001). Other causes of contagion are macroeconomic similarities, financial interdependence, common shocks and shifts in investor sentiment (alternatively, market psychology, herd behavior, ‘rush for the exits’ and so on) (see Caramazza et al., 2000; Pesenti and Tille, 2000). Even neighborhood effects were investigated...
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