Contagion in Emerging Markets: When Wall Street is a carrier

Abstract

The paper examines the case in which the capital market is populated by informed and uninformed investors. The uninformed try to extract information from informed investors’ trades. This opens up the possibility that if informed investors are forced to sell emerging market securities to meet margin calls, for example, this action may be misread by the uninformed investors as signaling low returns in emerging markets. The paper presents a simple model in which this type of Wall Street confusion may result in a collapse in emerging markets’ output.