Stops in Emerging Economies: Equity and Bond

Abstract

? For EMEs, both push (global and contagion) and pull (domestic) factors are significantly associated with both equity- and bond-led stop episodes. For AEs, however, stop episodes are mainly led by push factors. Higher global risk raises the probability of both equity and bond stops regardless of country groupings. However, global liquidity and global growth are also important in case of equity stops. Equity stops are more likely to occur with higher global liquidity and growth rates in both EMEs and AEs. Contagion effects are more important in AEs than in EMEs. Regional linkage is an important contagion channel in EMEs, but other channels such as financial or trade linkage are also effective in AEs. For EMEs, a country that is financially more closed and imposes more capital controls is more likely to experience stop episodes. Our empirical results indicate that capital control is not an effective means of reducing sudden stop episodes in capital inflows, and rather it may raise the likelihood of such events. Countries with deeper financial markets have more chances to experience stop episodes, especially for bond.