Publication: Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies
Date
2004-02
ISSN
Published
2004-02
Author(s)
Abstract
The authors argue that short termism,
dollarization, and the use of foreign jurisdictions are
endogenous ways of coping with systemic risks prevalent in
emerging markets. They represent a symptom at least as much
as a problem. These coping mechanisms are jointly determined
and the choice of one of them involves risk tradeoffs.
Various conclusions can be derived from the analysis. First,
because of the dominance of dollar contracts over
short-duration contracts, dedollarization might be much more
difficult to achieve than often believed. Second,
one-dimensional policies aimed at reducing currency and
duration mismatches might just displace risk and not
diminish it. Third, as systemic risks rise, the market
equilibrium settles in favor of investor protection against
price risk (through dollar and short-duration contracts) at
the expense of exposure to credit risk. Finally, the option
value to litigate in the event of default might explain this
equilibrium outcome.
Citation
“de la Torre, Augusto; Schmukler, Sergio L.. 2004. Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies. Policy Research Working Paper;No.3212. © World Bank, Washington, D.C.. http://hdl.handle.net/10986/14788 License: CC BY 3.0 IGO.”
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