Description:
The paper documents an intriguing
development in the emerging world in the 2000s: a decoupling
from the business cycle of advanced countries, combined with
the strengthening of the co-movements in the main emerging
market assets that predates the synchronized sell-off during
the crisis. In addition, the paper tests the hypothesis that
financial globalization, to the extent that it creates a
common, global investor base for emerging markets, could
lead to a tighter asset correlation despite the weaker
economic ties. While an examination of the impact of
alternative financial globalization proxies does not yield
conclusive results, a closer look at global emerging market
equity and bond funds shows that the latter indeed foster
financial recoupling during downturns, reflecting the fact
that they trade near their respective benchmarks and respond
to withdrawals by liquidating holdings across the board.