Assessment of the impact of the argentine crisis in 2018 on the destabilization of the exchange rates of Latin American countries

Abstract

Importance: the issues of transferring financial instability from the Argentine peso to the currencies of other Latin American countries under the influence of the Argentine currency crisis in 2018 are considered. To assess instability, the methodology of «financial contagion» was used using the DCC-GARCH modeling toolkit. Purpose: to identify countries in the Latin American region whose national currencies have shown vulnerability to a currency shock from the Argentine peso, and to explain the reasons for exposure to «financial contagion» from the point of view of integrating the region’s economies. Research design: аn analysis of the volatility of the Argentine peso exchange rate was carried out, based on which two periods were identified – low and high volatility. Based on the calculated daily logarithmic returns of exchange rates in the « contagion transmitter – contagion recipient» bundles, one-dimensional DCC-GARCH models were built, after which the obtained average values of dynamic conditional correlations (DCC) were compared. The hypothesis of instability transmission was not rejected if the average DCC in the crisis period was exceeded compared to the stable period, if the calculations obtained were confirmed by the Student’s test statistics. Results: the currencies of seven countries took over the «financial contagion»: the Brazilian real, the Guatemalan quetzal, the Colombian peso, the Costa Rican colon, the Cordoba, the Peruvian sol, and the Chilean peso. The remaining currencies proved to be resistant to the currency shock. The main reason for the transfer of instability from one currency to another is the close economic (trade) ties between the countries in the region.