The Transmission of Federal Reserve Tapering News to Emerging Financial Markets

27 Pages Posted: 7 Jun 2014

See all articles by Joshua Aizenman

Joshua Aizenman

University of Southern California - Department of Economics; National Bureau of Economic Research (NBER)

Mahir Binici

University of California, Santa Cruz; International Monetary Fund (IMF)

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 4, 2014

Abstract

This paper evaluates the impact of tapering “news” announcements by Fed senior policy makers on financial markets in emerging economies. We apply a panel framework using daily data, and find that emerging market asset prices respond most to statements by Fed Chairman Bernanke, and much less to other Fed officials. We group emerging markets into those with “robust” fundamentals (current account surpluses, high international reserves and low external debt) and those with “fragile” fundamentals and, intriguingly, find that the stronger group was more adversely exposed to tapering news than the weaker group. News of tapering coming from Chairman Bernanke is associated with much larger exchange rate depreciation, drops in the stock market, and increases in sovereign CDS spreads of the robust group compared with the fragile group. A possible interpretation is that tapering news had less impact on countries that received fewer inflows of funds in the first instance during the quantitative years and had less to lose in terms of repatriation of capital and reversal of carry-trade activities.

Suggested Citation

Aizenman, Joshua and Binici, Mahir and Hutchison, Michael M., The Transmission of Federal Reserve Tapering News to Emerging Financial Markets (June 4, 2014). Available at SSRN: https://ssrn.com/abstract=2446738 or http://dx.doi.org/10.2139/ssrn.2446738

Joshua Aizenman (Contact Author)

University of Southern California - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Mahir Binici

University of California, Santa Cruz ( email )

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International Monetary Fund (IMF)

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Michael M. Hutchison

University of California, Santa Cruz - Department of Economics ( email )

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Santa Cruz, CA 95064
United States
831-459-2600 (Phone)
831-459-5900 (Fax)

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