Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies

We analyse how short termism, dollarization and foreign jurisdictions are ways of coping with systemic risks prevalent in emerging economies. These are symptoms at least as much as problems. We conclude first that under high systemic risks, the market equilibrium settles in favour of investor protec...

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Main Authors:	de la Torre, Augusto, Schmukler, Sergio L.
Format:	Journal Article
Language:	en_US
Published:	Wiley 2013
Subjects:	currency mismatch maturity mismatch dollarization financial development
Online Access:	http://hdl.handle.net/10986/16216

id	okr-10986-16216
recordtype	oai_dc
spelling	okr-10986-162162021-04-23T14:03:28Z Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies de la Torre, Augusto Schmukler, Sergio L. currency mismatch maturity mismatch dollarization financial development We analyse how short termism, dollarization and foreign jurisdictions are ways of coping with systemic risks prevalent in emerging economies. These are symptoms at least as much as problems. We conclude first that under high systemic risks, the market equilibrium settles in favour of investor protection against price risk (through short-duration peso and dollar contracts) instead of protection against default risk. Second, the option value to litigate in the event of default, which is higher in dollar and foreign-jurisdiction contracts, may explain this equilibrium outcome and, more generally, the ‘original sin’. Third, dollar contracts trump short-duration peso contracts as a risk-coping device; they are a better hedge against inflation volatility and are superior at mitigating the risk of loss given default. Fourth, according to a conservation principle, the mitigation of risk via the use of a coping mechanism allows additional risk taking in other forms, leaving total risk unchanged. 2013-11-04T22:31:16Z 2013-11-04T22:31:16Z 2005-01-12 Journal Article International Finance 1367-0271 http://hdl.handle.net/10986/16216 en_US CC BY-NC-ND 3.0 IGO http://creativecommons.org/licenses/by-nc-nd/3.0/igo World Bank Wiley Publications & Research :: Journal Article Publications & Research
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	en_US
topic	currency mismatch maturity mismatch dollarization financial development
spellingShingle	currency mismatch maturity mismatch dollarization financial development de la Torre, Augusto Schmukler, Sergio L. Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies
description	We analyse how short termism, dollarization and foreign jurisdictions are ways of coping with systemic risks prevalent in emerging economies. These are symptoms at least as much as problems. We conclude first that under high systemic risks, the market equilibrium settles in favour of investor protection against price risk (through short-duration peso and dollar contracts) instead of protection against default risk. Second, the option value to litigate in the event of default, which is higher in dollar and foreign-jurisdiction contracts, may explain this equilibrium outcome and, more generally, the ‘original sin’. Third, dollar contracts trump short-duration peso contracts as a risk-coping device; they are a better hedge against inflation volatility and are superior at mitigating the risk of loss given default. Fourth, according to a conservation principle, the mitigation of risk via the use of a coping mechanism allows additional risk taking in other forms, leaving total risk unchanged.
format	Journal Article
author	de la Torre, Augusto Schmukler, Sergio L.
author_facet	de la Torre, Augusto Schmukler, Sergio L.
author_sort	de la Torre, Augusto
title	Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies
title_short	Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies
title_full	Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies
title_fullStr	Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies
title_full_unstemmed	Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies
title_sort	coping with risk through mismatches : domestic and international financial contracts for emerging economies
publisher	Wiley
publishDate	2013
url	http://hdl.handle.net/10986/16216
_version_	1764432533172256768

Coping with Risk through Mismatches : Domestic and International Financial Contracts for Emerging Economies

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