Mexican peso crisis and its spillover effects to emerging market debt

Abstract

This paper examines the spillover effects of the Mexican financial crisis to emerging financial markets. As of November 1994, the financial markets were not anticipating a change in exchange rate regime in Mexico. Coincident with the peso devaluation on 20, December 1994, Mexican Brady bond prices declined significantly and continued to experience significant decline during the subsequent three months. Emerging market assets reacted differently to the Mexican crisis. Latin America as a region was more exposed to the Mexican crisis than emerging markets from other regions. The ratio of liquid monetary assets to international reserves and the ratio of current account to GDP were the most influential variables in explaining variation in CARs across countries. Trade competition with third markets was the most significant transmission channel during the Mexican crisis.