This paper expands on the work of Sarno and Taylor (1999) and develops three alternative models in which creditor moral hazard might occur in equity markets under different assumptions regarding the existence of asset market bubbles and implicit guarantees. Incorporating IMF-related news...

Previous tests of creditor moral hazard cannot distinguish between two types of investor behavior: expectations of implicit guarantees or better future economic fundamentals due to a prospective IMF program. The novelty of our approach lies in the inclusion of the forward foreign exchange rate...