Emerging Markets in an Anxious Global Economy

Fostel, Ana; Geanakoplos, John

doi:10.2139/ssrn.1105367

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Emerging Markets in an Anxious Global Economy

Cowles Foundation Discussion Paper No. 1646

54 Pages Posted: 12 Mar 2008

See all articles by Ana Fostel

Ana Fostel

Yale University - Department of Economics

John Geanakoplos

Yale University; Santa Fe Institute

Date Written: March 2008

Abstract

We provide a theory of pricing for emerging asset classes, like emerging markets, that are not yet mature enough to be attractive to the general public. Our model provides an explanation for the volatile access of emerging economies to international financial markets and for several stylized facts we identify in the data during the 1990's. We present a general equilibrium model with incomplete markets and endogenous collateral and an extension encompassing adverse selection. We show that contagion, flight to liquidity and issuance rationing can occur in equilibrium during what we call global anxious times.

Keywords: Margin, Leverage cycle, Liquidity preference, Collateral value, Informational volatility, Contagion, Portfolio effect, Flight to liquidity, Asymmetric information, Issuance rationing, Anxious economy, Emerging markets, High yield, Market closures

JEL Classification: D52, F34, F36, G15

Suggested Citation: Suggested Citation

Fostel, Ana and Geanakoplos, John D, Emerging Markets in an Anxious Global Economy (March 2008). Cowles Foundation Discussion Paper No. 1646, Available at SSRN: https://ssrn.com/abstract=1105367 or http://dx.doi.org/10.2139/ssrn.1105367