2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Behavioral Implications of Asian Bond and Stock Indices during the 97-98 Crisis
Priscilla Liang
Assistant Professor of Finance
Martin V. Smith School of Business & Economics
California State University Channel Islands
One University Drive
Camarillo, CA 93012
Tel: 805.437.8926
Fax: 805.437. 8951
priscilla.liang@csuci.edu
Thomas Willett
Horton Professor of Economics
Claremont Graduate University and Claremont McKenna College
150 E. Tenth Street
Claremont, CA 91711
Tel: 909.621.8787
Fax: 909.621.8460
Thomas.willett@cgu.edu
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Behavioral Implications of Asian Bond and Stock Indices during the 97-98 Crisis
Abstract
This essay tests four behavioral hypotheses about the Asian financial crisis panic, contagion, undifferentiated risk perception and overreaction. Test results show that
none of the behavioral claims stand in Asian stock markets. There was a mild panic or
contagion in the bond markets during July-September of 1998. Global investors increased
risk premiums to all Asian bonds simultaneously during this period as well. However,
when the crisis originated within the Asian region during 1997 and continued through
early 1998, investors’ risk perception for each Asian bond was different.
Keyword: Behavioral Finance, Asian Financial Crisis, Contagion, Panic, Risk Perception,
Overreaction
JEL Classification: G11, G15, G20
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Behavioral Implications of Asian Bond and Stock Indices during the 97-98 Crisis
1. Introduction
For the past two decades, financial crises have drawn tremendous attention of
academic researchers. Most crises are associated with domestic economic and financial
weaknesses (Kaminsky 2003). Yet causes of some crises remain unclear. In particular,
global investors’ behavior and the role they played during a crisis is still a mystery.
The Asian financial crisis in 1997-1998 hit a group of seemingly healthy countries
with impressive economic growth, balanced government budgets and conservative
monetary policies. Shocked by the suddenness and devastation of the crisis, researchers
started to analyze the effect of market psychology during the crisis. Various investors’
behavior--panic, contagion, herding, overoptimism, overreaction, and investors’
responses to global portfolio constraints, all have been connected to the onset of the
Asian financial crisis.
Examining stock and bond indices of selected crisis countries, this study tests four
behavioral hypotheses of the Asian financial crisis: panic, contagion, similar risk
perception, and overreaction. Test results show that there is little evidence of pure panic
during the crisis. There may have been a mild panic or contagion in the bond market
during late 1998. Investors did not treat Asian bonds with the same risk perception when
the crisis originated from within, but they increased risk premiums to Asian bonds
simultaneously when Russia defaulted on its debt. Asian stock markets did not show
signs of mean reversion for nearly seven years, which contradict with the theory of
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market overreaction. These findings lead to important policy implications of these
emerging markets.
2. Review of Four Behavioral Views of the Asian Financial Crisis
Some researchers think that neither domestic economic conditions nor
international response could justify the speed and the depth of the Asian crisis (McKibbin
1998). They argue that investors’ panic, overreaction and other irrational market
sentiments had caused the crisis in countries with strong macroeconomic fundamentals.
2.1. The Panic and the ‘Moron Speculator’
Shocked by the magnitude and the speed of the dramatic loss in Asia, some
concluded that ‘panic selling drove prices lower’,1 and that what happened in one country
‘spooked investors into panic’ in another.2 According to Radelet and Sachs (2000),
investors’ panic was an important cause of the crisis. Park and Song (2001) argue that
countries like Korea were pure victims of the panic reaction. In their view, the crisis in
Taiwan and Hong Kong had spread to Korea. The creditors panicked and refused to roll
over the short term debt to Korea.
Another version of the victim view followed after the Prime Minister of Malaysia
Dr. Mahathir blamed international financier George Soros for destroying the Malaysian
economy. Mahathir went as far as calling George Soros a ‘moron’ from ‘moronia.’3 To
defend against what he saw as irrational speculative attacks, Mahathir did not adopt IMF
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mandated reforms. Instead he imposed controls on the flow of capital in and out of the
country.
2.2. The Contagion View
Others have suggested that contagion was the cause of the Asian crisis. In
psychology, contagion spreads a behavior pattern, attitude, or emotion from person to
person or from group to group through suggestion, propaganda, rumor, or imitation.4
Contagion therefore spreads the crisis during the time of financial distress. It leads a
country into disequilibrium simply because its neighbor had a crisis.
Contagion can be irrational panic or herding, or rational responses of investors to
market imperfections, or simply the outcome of global portfolio management. Many
Asian countries went through financial liberalization in 1980s and 1990s. Increased
openness and globalization provides investors with great opportunities for diversification,
but it also raises new issues in portfolio management. Information asymmetries between
informed and uninformed investors can cause investors to mimic each others’ behavior
during a crisis (Barlevy and Veronesi 2003).
Leveraged investing and managerial
incentive structures may lead to rational contagion that transmits volatility among
countries (Chakravorti and Lall 2004).
A large number of studies have tested the presence of contagion in foreign
exchange, bond and stock markets in Asia. Initial studies usually find evidence of
contagion. Later ones have mixed results. Because definitions and methodologies5 on
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contagion research vary, there is no conclusive answer for whether there was contagion
during the Asian crisis.
2.3. The Undifferentiated Risk Perception View
Another behavioral hypothesis is that investors didn’t differentiate among
individual Asian countries during the crisis. Rational ignorance (Calvo and Mendoza
2000), in which global investors do not want to spend on collecting information on an
individual country, or investors’ similarity heuristics6 might be the reasons that cause
same risk perception to all countries during a crisis. Such non-differentiated risk
perception has been blamed for quick transmission of the Asian flu from one country to
another. Some had shown that investors have ‘excessively low’ risk perception for all
Asian bonds before the crisis and ‘excessively high’ ones after (Sy 2001). Mishkin (2003)
points to the role of asymmetric information that led investors to magnify relatively small
risks in all Asian countries. Baig and Goldfajn (1999) find that cross country sovereign
spread correlations are high during the crisis, concluding that ‘the global investors treated
these five countries’ financial fragility with a broad stroke by demanding high risk
premiums for all of them during the crisis.’ (P176)
2.4. The Overreaction and the Mean Reversion View
Another crisis related behavioral bias is overreaction. During a crisis, overreaction
leads to losses beyond what can be justified by fundamental weaknesses. Overreactions
usually are adjusted quickly. Large deviations from a long term average might be an
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indication of investors’ overreaction if the market returns to/toward the mean shortly after
a crisis.
A number of studies find mean reversion in Asia, and the effect of the Asian crisis
is only temporary. Fujii (2002) shows the real exchange rates in Asia had mean reversion
shortly after the crisis. This is consistent with the view that investors overreacted, causing
exchange rate overshooting.7 Malliaropulos and Priestley (1999) also find evidence of
mean reversion in Asian stock markets. It is commonly known that emerging stock
markets tend to fall rapidly and steeply during a crisis, and they take longer to recover, on
average three to four years (Patel and Sarkar 1998). Mean reversion is not the only
phenomenon for overreaction. However, when several countries’ securities all recovered
to their means quickly, investors might have overreacted during the crisis. If there is no
short term mean reversion, overreaction is unlikely.
There are differences among the four behavioral hypotheses reviewed.
Conceptually, panic can be restrained within a nation, but contagion spreads a crisis from
one country to another. If investors withdraw from the entire region simply because one
or several countries are in a crisis, they do not differentiate but treat the region as a single
unit with similar risk perception. Panic, contagion and similar risk perception can lead a
country with no fundamental weaknesses to a crisis. For the fourth hypothesis to stand, a
country has to experience a financial distress for investors to react, and then to overreact.
Four behavioral hypotheses reviewed have been connected to the onset of the
Asian financial crisis. But there is no definite conclusion made on their soundness. Even
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though these hypotheses are somewhat conceptually different, empirically separating
them is a difficult task. There is an overlapping of these behavioral phenomena. For
example, panic can lead to contagion. Investors have no risk differentiation when
contagion is spread on a regional scale. In other words, these behavioral phenomena are
observationally equivalent, which makes hypothesis testing difficult. Unfortunately,
existing behavioral research mainly focuses on hypotheses testing, and often applies
single factor analyses in which one type of market sentiment is solely traced to crisis
causation with drastic and extreme results.
To study the four behavioral hypotheses during the Asian financial crisis, this
paper takes another approach. Instead of testing them directly, the study analyzes their
testable implications. To state it in another way, in order to validate the existence of these
behavioral claims, this paper examines the soundness of their behavioral assumptions and
related phenomena.
Research focuses on testable implications is limited. Among the few, Jo (2000)
studied foreign exchange markets and found investors simply did not systematically
overreact to bad news during the Asian crisis. Willett, Budiman, Denzau and Jo (2001)
investigated the patterns of capital flows and refuted extreme forms of contagion and
moral hazards as causes of the crisis. To study global investors’ behavior, Borensztein
and Galos (2000) examined emerging market mutual funds, and Dooly and Shin (2000)
studied the patterns of private capital inflows in Korea.
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3. Data and Methodologies
3.1. Data
This paper analyzes stock and bond country indices for Thailand, Malaysia,
Indonesia, the Philippines and Korea (hereafter referred to as the ‘Crisis Five’ countries).
Five S&P Global (S&P/IFCG) Stock Indices8 are from the Emerging Markets Database
(EMDB) and four9 Emerging Market Bond Index (EMBI) Global Indices10 are from J.P.
Morgan. All analyses are performed using total returns denominated in US dollars.
3.2. Methodologies
The study first defines decline periods for the Crisis Five’s financial assets. Then
it proposes several methods to analyze contagion and investors’ risk perception during
the crisis. It calculates simple correlation coefficients to evaluate interdependence among
assets. And it measures contagion effects by using VAR to factor out fundamentals. It
also calculates unconditional correlations from the VAR residuals to adjust for
heteroscedasticity (Forbe and Rigobon 2002).
To test panic and overreaction, the paper analyzes patterns and characteristics of
stock and bond indices to check if certain testable implications apply.
3.2.1. Define Non-decline vs. Decline Periods
Since there were many onset points during the Asian financial crisis, it is difficult
to define when the crisis started or ended. Many scholars have used the downward
movement patterns of Asian currencies as the guidance to set the time frame to study
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Asian financial distress. For example, many used the Thai Baht devaluation date
(7/2/1997) as the start of the crisis, and ended the crisis in May or August 1998 when
currency markets started to stabilize (Dungey, Fry, Gonzales-Hermosillo and Martin
2005b).
While this definition is useful in analyzing currency market behavior, the
purpose here, however, is to analyze the behavior of the Crisis Five’s stocks and bonds.
These assets share similar behavior to that of currencies, but they also have unique
characteristics. For example, the Crisis Five’s stock indices experienced declines long
before the Thai Baht devaluation. Both bonds and stocks reached their minimum points in
September of 1998 due to the impact from the Russian crisis.
To differentiate this study from earlier ones which mostly address the Asian
financial crisis as a currency crisis, this research defines the financial distress periods in
stock and bond markets as ‘decline’ periods. It makes an attempt to separate the nondecline vs. decline periods for Asian bonds and stocks in two ways. Examined first is the
descriptive behavior of bonds and stocks. Then the CUSUM of squares attempts an
objective determination of when the financial distress begins and ends. Results from two
methods are compared and final analyses are made based on both sets of outcomes.
CUSUM of Square Test
Structural breaks are used to separate non-decline vs. decline periods of Asian
stocks and bonds. The Chow test is commonly used for testing of structural breaks (Chow
1960). However, the Chow test requires prior knowledge of the break points. Foreign
exchange markets in Asia had given out a clear signal of distress in 7/2/1997. But stock
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and bond markets do not show a universal sign of the crisis. To detect significant changes
in these markets, the CUSUM of square test is used to allow the data to determine its own
break points. Two-year daily data (1997-1998) is employed.
The squared CUSUM test (Brown, Durbin, and Evans 1975) uses the cumulative
sum of the recursive residuals from the recursive least squares.11 The test statistic
follows:
S
t
  r2 /
r  k 1
T

r  k 1
2
r
(1)
Where  is recursive residuals, T is a total sample size, t is a sub-sample size and
k is a number of estimated coefficient. The squared CUSUM graph plots the proportional
relationship of the cumulative sum of residual squares of the sub-sample to the sum of
residual squares of the total sample with the 5 percent critical lines. The test finds
parameter or variance instability if this proportional relationship goes outside of the
critical range.12
3.2.2. Tests of Contagion Effects and Risk Perceptions
There is a wide range of definitions and testing methodologies of contagion. One
of the common methods is to calculate co-movements among assets. Contagion can be
measured as general co-movements of assets returns. In this sense, changes of asset
returns in one country will lead to changes in another. Such interrelated changes may be
due to shared fundamentals, a common third party or investors’ aggregate irrational
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behavior. This paper refers to this high degree of general co-movements among assets as
‘interdependence,’ which is measured by simple correlation coefficients of asset returns.
Contagion can also be measured as excess co-movements of asset returns that
cannot be explained by common factors and shared fundamentals. Investors’ behavior is
one of the reasons that cause such excess co-movements during a crisis. This paper
defines ‘contagion’ as excess co-movements after fundamentals and common factors are
factored out.
There is considerable disagreement regarding the definition of the fundamentals,
how and why the fundamentals differ across countries, and the mechanisms that link the
fundamentals to asset returns. Researchers often construct a set of explanatory variables
to measure the long term effect of fundamentals (Eichengreen, Rose and Wyplosz 1996).
This method is useful when monthly, quarterly or annual data are used. But it is difficult
to observe the impact of macroeconomic fundamentals on daily data. When high
frequency data are used, some have used a benchmark, either a composite index or a US
stock index, such as S&P 500, to proxy fundamentals (Baig and Goldfajn 1999).
However, emerging market data are often non-linear and non-normally distributed.
Statistical results from a simple linear regression cannot capture the dynamic relationship
among emerging assets. Thus, instead of explicitly modeling fundamentals, researchers
try to capture fundamentals with a set of latent factors or with lagged structures to avoid
omitted variable bias.
Autoregressive methods in which variables are regressed on their own lag(s) and
lags of other interrelated variables are often used to model the short term behavior of
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financial assets. Such lagged structures capture not only the short term fundamental
effects but also the common factors among assets. Another commonly used method is
latent factor analysis, in which fundamentals are treated as a set of latent factors (Dungey
and Martin 2005a). The moments of distribution of their effect on the financial assets are
evaluated implicitly. ARCH and GARCH are often used to adjust the time varying
volatility.
Autoregressive and latent factor methods both model short term behavior of
financial instruments well and are commonly used in contagion analyses. The advantage
of an Autoregressive method is that it can solve endogeneity problem by modeling every
endogenous variable as a function of the lagged values of all of the endogenous variables
in the system. Thus an autoregressive model - VAR model is used in this study.
VAR
Equations in a VAR are structural in the sense that they contain contemporaneous
values of all multivariables of interest in each equation. The mathematical form of a VAR
(Sims 1980) is:
y t  A1 y t 1  ...  Ap y t  p  Bx t   t
(2)
where yt is a k vector of endogenous variables. All bond and stock indices are included
as endogenous variables. xt is a d vector of exogenous variables. The only exogenous
variable used is the constant.
A1 ,..., AP and B are matrices of coefficients to be
estimated.  t is a vector of innovations that may be contemporaneously correlated with
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each other but are uncorrelated with their own lagged values and uncorrelated with all of
the right-hand side variables.
Only stationary data can offer non-spurious results. Unit root tests indicate all
indices are non-stationary. So the first difference of each index was taken to make it
stationary before utilizing VAR. Lag length of one day is used for VAR test based on
Schwarz information criterion.
After the fundamentals and common factors are captured by VAR, the residuals
from the VAR represent the idiosyncratic factor of each asset. Correlation coefficients of
the residuals measure the excess co-movements, or the contagion effects among assets.
Unconditional Correlations
Forbes and Rigobon (2002) argue that correlations are positive functions of
volatility13. They suggest calculating unconditional correlations to scale down the
upwards biasness of estimated correlation due to increased volatility during a crisis.
The unconditional correlation is calculated as:
y
y 
1 (
 y2,i   x2,i

2
x ,i
(3)
)(1   y2 )
Where  y is the correlation between two asset in the crisis period,  y is the
unconditional correlation in the crisis period, and  y2,i and  x2,i are the variances of the
asset returns in the crisis and non-crisis periods.
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If the unconditional correlation  y during the crisis is not statistically different
from the non-crisis correlation  x , then there is no contagion effect during the crisis.
Thus, the null hypothesis is:
H o : y   x
H a : y   x
(Contagion)
(4)
A t-statistic for testing this hypothesis is:
FRt 
Where ˆ y
ˆ y  ˆ x
(5)
1
1

T y Tx
and ̂ x are estimated values of correlations during crisis and non-crisis
periods. T y is the sample size for the crisis period, and Tx is the sample size for the noncrisis period.
3.2.3. Summary of Methodologies
Briefly summing up the methodologies, this paper first uses both descriptive and
CUSUM of squares test to determine structure breaks of the Asian financial assets. These
breakpoints are used to determine the decline vs. non-decline periods for Asian stocks
and bonds during the financial distress. Then, the study calculates simple and VAR
residual correlations to evaluate interdependence and contagion effects of assets returns,
and to examine investors’ risk perceptions. Unconditional correlations are also analyzed.
Thus, there are three sets of measurements of comovements of asset returns – general comovements, co-movements after controlled for common factors and co-movements after
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controlled for both commons and volatilities. Analyses and comparison of these
measurements will provide better understanding of contagion effects and investors’ risk
perception during the Asian financial crisis. Finally, the study investigates statistical
characteristics of stock and bond returns to test implications of panic and overreaction
hypotheses.
4. Empirical Results
Empirical results show that decline periods defined from the descriptive analysis
and the CUSUM of squares test are almost identical. Testable implications reject all the
behavioral claims in Asian stock markets. But one cannot reject the possibility of mild
panic or contagion in bond markets during the third quarter of 1998. Also, investors had
increased risk premiums to Asian bonds simultaneously during this period.
4.1. Non-Decline vs. Decline Periods
This paper defines the decline period for Asian stocks from 1/22/97 to 9/21/98.
This is determined from the first country’s stock index reaches a maximum before a big
decline in the beginning of 1997 (Thailand 1/22/97)14 to the last country’s index falls to a
minimum (Korea and Indonesia, 9/21/98) in the later half of 1998. Based on the two
cycle patterns of all indices, the study separates this long recession into two sub-periods
of 1/22/97-1/23/98 and 3/23/98-9/21/98. These cutoff points are determined from the
time that the first country’s stock index hits the local maximum to the last country’s
index reaches local minimum. Based on the same method, the decline period for bond
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markets is defined from 10/3/97 to 9/9/98. It also can be separated into two sub-periods:
the first is 10/3/97-1/9/98, and the second is 7/17/98-9/9/98. Each country reaches these
extremes at slightly different times (See Figure 1).
One can employ a more objective way to determine a set of break points by using
the CUSUM of Squares Test. Due to the limitations of the data,15 the CUSUM of squares
did not capture the breaks in early 1997 when all indices are used as endogenous
variables.
The CUSUM of squares find bonds change their structural patterns
dramatically in 10/97 and 9/98. The middle break point for the Thai bond is in 1/98.
These results are consistent with the earlier judgments. But the middle breakpoints for
Korea and the Philippines are in 3/98. They are later than the descriptive solutions (in
1/98).
To remedy the missing data problem, the test is re-conducted using only stock
indices (1997-1998) as endogenous variables. Additional break points are derived in/near
February and July of 9716 for stock indices. Figure 2 shows the CUSUM of squares test
results.
The differences between the descriptive results and the CUSUM squares results
are minor. Most breakpoints derived from the two methods match, with the exceptions of
3/98 for bonds and 7/97 for stocks. There were no significant changes of data during
March 1998. But the chronology of the Asian financial crisis shows that March was a
troubled month for Indonesia and Russia.17 There might be some transmission of shocks
from these countries to other markets.
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In order to perform the VAR test, uniform decline periods for all indices have to
be determined, or at least the same breakpoints for all indices within the bond and stock
sub-groups need to be determined. As a result, the decline period for stocks is defined as
from 1/22/97 to 9/21/98, with the first sub- period is 1/22/97-1/23/98, and the second is
3/23/98-9/21/98. The decline period for bonds is defined as from 10/3/97 to 9/9/98. The
first sub- period is 10/3/97-1/9/98, and the second is 7/17/98-9/9/98. Others studying
Asian stocks or bonds have used similar break points determined here (Dungey et al.
2005b, Forbes and Rigobon 2002, Rigobon 2002).
To test the robustness of the results, different breakpoints derived from the
CUSUM of squares, such as 7/97 and 3/98, are used to conduct sensitivity analyses. In
addition, 10/97 and 8/98 are also analyzed to study shocks transmitted from Hong Kong
and Russia.
4.2. Testable Implications
4.2.1. The Panic and the Irrational Speculator View
Stocks
During the long run (1990-2005), the Crisis Five’s stock indices behave
differently: Philippine and Thai stocks were quite volatile, experiencing ‘bubble’ like
increases during 94-96. Korea has been increasing steadily since 2000, while Indonesia
and Malaysia have not changed much for the past fifteen years (Figure 3). Most Asian
indices offered slightly higher returns than that of a global composite index, but their
volatilities were two to three times higher (Table 1).
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However, stock indices followed somewhat similar patterns in 1997-1998 (Figure
4). All five stocks had experienced long, gradual declines, twice. Daily data in 19971998 show that most stock indices started to decline before the Thai Baht unraveled. As a
matter of fact, the Thai stock index started to fall as early as in May 1996. Philippine,
Korean, Indonesian and Malaysian stocks started decline in February 1997. The first
cycle of long decline lasted until January 1998 (except Korea was in December 97). All
series recovered slightly in the beginning of 1998, but dropped to new lows again in six
months. Compare to a global benchmark index or the S&P 500 index, all five Asian
indices (except Korea) offered global investors lower returns and much higher volatilities
during 1997-1998.
Although most stocks eventually hit the bottom in September 98, the first decline
cycle lasted much longer than the second one, and the impacts were much more severe.
Table 2 shows the level effects, or loss in returns during the first period of the decline
(1/22/97-1/23/98) versus during the total decline (1/22/97-9/21/98). Results indicate that
percentage decreases of the five index returns range from 75.04 percent to 90.56 percent
during the first decline period, and that more than 90 percent of the total loss of the crisis
happened in first decline.
The severity of such a huge loss in wealth promoted panic or irrational
speculative attack18 views of the Asian financial crisis. However, if these views were
true, one should have observed significant decreases in stock returns within a very short
time frame, beginning when the currency crisis hit. But statistics show that most stock
indices experienced declines long before the Thai Baht devalued.
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In other word, Asian stock markets had responded to the weak financial and
corporate sectors of the crisis countries well before major currency devaluations. For
example, the equity in Indonesia fell in March 1997 ‘after various companies reported
disappointing profits,’ and after ‘great concerns about earning prospects in the bank
sectors.’19 The equity market in Korea had been brought down by numerous corporate
bankruptcies and labor strikes. Due to political incentive driven exchange rate policies in
Asia, currency markets were not allowed to respond to weakening domestic economic
conditions. But stock markets did. The fact that changes in stock prices follow changes in
microeconomic fundamentals raises serious doubt on panic theory
Pure panic should have been drastic, but quick. One should have seen a quick
recovery of the stock indices after the panic was over. Panic effects can last for a period
of time if they have changed the overall market expectations and generated a real crisis.
But a gradual decline that lasted for more than twelve months is difficult to be justified as
panic. A second wave of continuous decline of Asian stocks in January 98 confirms the
further weakening of the fundamentals. Malaysian and Philippine stocks had continued to
slide in the end of 1998, which further contradicts the panic theory.
The panic view, which may include such diverse phenomena as ‘bank runs,’
‘fickle investors,’ and ‘hot money,’ might be an explanation for a country that gets into a
crisis without weakness in fundamentals (Chang and Velasco 1998). But the test results
of the Crisis Five’s stocks show that pure panic is not to blame for their loss. On the
contrary, the long gradual decreases in stocks might just indicate that the financial
markets were sensitive to changes of fundamentals and unwise government policies. For
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example, in August 97, there was a massive sell-off of Malaysian stocks after the
government put restrictions on short selling of 100 stocks comprising the main
benchmark index in the Kuala Lumpur Stock Exchange (KLSE).
Bonds
The crisis countries’ bond indices had all been increasing steadily over the long
term, except for two ups and downs during 1997-1998 (Figure 5). All four indices
reached their minimum points in August/September of 1998, the same time stocks hit the
bottom (Figure 6). Compare with the EMBI global composite, Asian bonds offer higher
returns and lower volatilities during 1997-1998 (only Malaysian bond had a lower return
and a higher standard deviation). In the long run (1993-2005), they are less volatile, but
less profitable as well (Table 1).
Bond indices had only experienced slight decreases during the two decline
periods defined earlier. Except for that of Thai bond, average values of bonds didn’t
change significantly during the first time they decline (Table 3). The drops during the
second period were more obvious than those in the first one (Figure 7), with percentage
decreases for Korean, Malaysian, Philippine and Thai bonds as 6 percent, 14 percent, 7
percent and 10 percent. Such changes are small if compared with the significant
decreases in the currency markets during the same time frame. But Asian bonds have low
volatilities historically. If one compares these changes to Asian bonds’ normal range of
fluctuations of 3.09 percent, 3.57 percent, 3.48 percent and 4.42 percent during 19932005 (Table 1), they are rather dramatic. Further, one does not observe panic like sudden,
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brief changes in Asian stock returns, but such quick decline and recovery behavior can be
seen in bond indices. Thus, one cannot eliminate the possibility that there might be a mild
panic in bond markets during July-September of 1998 when the Russian crisis caused
significant damages to the entire global financial markets.
4.2.2. The Contagion View
If there were contagion in Asian financial markets, one would expect to observe
significant increases in correlations only during the decline periods. But test results show
that simple correlation coefficients are high among all assets during all time, indicating a
high degree of interdependence. After controlling for fundamentals and common factors
using VAR, residual correlations are higher among bonds during bonds’ second decline
period, showing signs of mild contagion. There is no significant contagion effect after
adjusting for volatility.
Long- Term Simple Correlation Coefficients (1990-2005)
Longer term correlations are calculated using monthly data from 1990-2005. In
general, stocks had moderate correlations with other stocks before 1997, but high
correlations after, including the after crisis period from 1999-2005. A bond index had
high correlations with other bonds, but correlations had decreased during 1997-1998, and
went back up afterward (Table 4a-4b).
Long term simple correlations show that there is a historically high degree of
interdependence among assets. The Crisis Five share similar economic fundamentals and
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all have significant trade links with Japan and the U.S. Financial distress in one market
may cause cross border volatility spillover (Glick and Rose 1999). Since the crisis, Asian
stocks and bonds had experienced more positive relationships than before.
Short- Term Simple Correlation Coefficients (1997-1998)
Correlations among stocks had increased during their two decline periods, but
remained high after 9/21/98 (Table 5). A bond has high correlations with other bonds in
general. The relationship decreased during the first time bonds decline (except for Thai
bond), but increased during the second. Correlations remained high after 9/9/98 (Table
6).
There are some interesting discoveries of stocks and bonds relationships. The
stock and bond index within the same country were no more closely correlated than their
relationship with any other assets. This maybe due to the fact that Asian stock exchanges
are market based, but interest rates are partially controlled by the government. Similar to
those of bond-bond, stock-stock relationship, stock-bond simple correlations were
significantly higher when stocks and bonds declined. Correlations remained high, all
above 0.8 at the end of 1998 when all assets start to recover. One possible explanation is
that the appreciation of the regional currencies and lower interest rates in the U.S and
Europe promoted all Asian financial markets to recover. Or it might be that the crisis had
simply boosted relationships among different assets. In general, stock-bond had higher
correlations in 98 than in 97.
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In conclusion, short term simple correlation coefficients also indicate that Asian
financial assets have a high degree of interdependence. They had been closely correlated
with or without the financial distress.
VAR Residual Correlations
After controlling for fundamentals and common factors using VAR, there were no
significant differences in stock-stock residual correlations during decline vs. non- decline
periods (Table 7). A bond still had higher correlations with other bonds during the second
decline (7/17/98-9/9/98), with the exception of the Malaysian bond, which had
decreasing relationships with other bonds due to the capital control imposed by the
government. Correlations among bonds have decreased after 9/9/98(Table 8). Since there
are significant20 increases in bonds correlations only during 7/17/98-9/9/98, there might
be some contagion effects during this period.
Taking the common factors and the fundamentals out by VAR, there were no
more high correlations among bonds and stocks during any decline periods. The high
correlations in the end of 1998 (after decline) had also disappeared.
Robustness tests using different break points give two interesting results. One,
Korean bond and stock have decreasing correlations, both simple and residual, with other
four crisis countries’ financial assets after 10/17/97, indicating changes in Korean
markets were less likely related to what happened in the four, but more likely correlated
to what happened in countries or regions that are not included here, such as Hong Kong
or Taiwan. Two, VAR residual correlations increased significantly among Asian bonds
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during the Russian crisis, indicating what happened in Russia had significant impacts on
the Asian bond markets.
Unconditional Correlation Coefficients
Unconditional correlations during the decline periods are calculated to scale down
the upward biasness of volatility effect. FR t-statistics show that after adjusting for
heteroskedasticity, there are no statistical differences among decline vs. non-decline
periods correlations. Different break points have been used to test for the robustness of
the results, and they all confirm the result that Forbes and Rigobon (2002) have found,
that there was no contagion effect after adjusting for volatility in Asian stock markets.
Test results from this paper also show that there were no significant increases of
unconditional correlations, or no contagion effect after adjusting for volatility, in Asian
bonds, and bond/stock relationships.
4.2.3. The Undifferentiated Risk Perception View
If investors had similar risk perception to all Asian countries, they should have
demanded higher rate of returns for all financial assets during the crisis, which would
have increased correlation coefficients among assets.
Comparing bond correlations during 1993-2005 vs. 1997-1998, one finds that
bond indices are highly correlated over the long run, but not so much during 1997-1998.
As an illustration, Malaysia-Korea’s correlation decreased from 0.98 to 0.49 in 19971998, and Malaysia-Thailand’s dropped from 0.98 to 0.34, only one third of its long-run
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value (Table 9). One might explain that the decreasing correlations of Malaysian bond
with others are due to imposed capital controls. But all other pairs decreased as well
during the crisis. Philippine and Korean bonds have a long run correlation of 0.98, but it
decreased to 0.63 during 1997-1998. These results show that there was no universal
increase in risk perceptions among Asian bonds during 1997-1998. This is different from
Baig and Goldfajn (1999)’s results. In their study, correlations in sovereign spreads are
high. Their explanation is that ‘the probability of private debt default was perceived to
have increased dramatically in all of these countries, and nervousness about one market
transmitted to other markets readily.’ (P176)
Differences in conclusions may be due to different samples examined. Baig and
Goldfajn employ sovereign spreads of the Crisis Five from 7/1/97 to 5/18/98. Such a
short time frame does not allow them to see the historically high correlations among
bonds, but only observe the relatively high relationship in isolation. Further, Emerging
Market Bond Indices (EMBI) used in this study cover a much broader range of debt
instruments than sovereign debt alone. EMBI provide a better understanding of how the
entire debt markets reacted to the crisis.
To compare with Baig and Goldfajn’s results, this paper also studied bonds’
short-term behavior using 1997-1998 daily data. Particular attention is paid to the two
decline periods defined earlier (10/3/97-1/9/98 and 7/17/98-9/9/98).
Without adjusting for common factors, a bond has high correlations with other
bonds during non-decline periods. Simple correlation coefficients decreased during the
first decline period, but bounced back to high levels during the second. Correlations
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remained high after 9/9/98 when the decline for bonds was over. After adjusting for
fundamentals and common factors using VAR, a bond had higher residual correlations
with other bonds during the second decline period, but not the first (Table 10)21.
Correlations between Philippine and Korean bond increased from 0.28 during the first
decline to 0.83 during the second. Residual correlations between Korean and Thai bond
increased from 0.68 to 0.85, and Philippine and Thai bond changed from 0.41 to 0.69.
These results indicate that global investors have treated individual Asian bond separately
during the early stage of the Asian crisis. But when the Russian crisis hit, they increased
risk premiums to all Asian bonds, which shows the severity of the Russian default. Many
considered the Russian default in August 1998 had contagious effects on many emerging
markets and even on U.S. corporate debt and mortgage backed securities spreads
(Dungey, Fry, Gonzalez-Hermosillo and Martin 2005c).
4.2.4. The Overreaction and the Mean Reversion View
Almost eight years have passed since the Asian financial crisis. Did investors
overreact during the crisis? Was the crisis a permanent shock or just a temporary one? If
the effect is just a temporary deviation, might we expect to see mean reversion of the
financial instruments.
There was indeed a recovery of the Asian bond markets. Crisis Five’s bond
indices have steadily increased after the crisis. But conclusions for Asian stock markets
are less clear. Four out of five stocks have after crisis means lower than their during crisis
means. Average returns of three indices in 2005 were lower than their long run averages
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(Table 11a-b). But by December 2005, only two indices, the Philippines and Thailand,
were a bit short away from their long term means.
Maybe one cannot conclude whether Asian stocks had experienced mean
reversion at this point. Not only do the data give no clear conclusion, but also the
research has not yet developed a better understanding of the mean reversion. For
example, economic growth rate, stock growth rate, long run averages etc, all have been
used as benchmarks for mean reversion analyses. Further, the long run average is
commonly used to proxy the long run equilibrium. But is this a reasonable
approximation? How long is considered as long run? Does mean reversion indicate that
the crisis has no permanent effects on the Asian financial markets? Are these effects good
or bad? There are still many questions concerning the true meanings of mean reversion.
Future research is suggested to further investigate these issues.
But at lease one conclusion can be drawn from this paper. Research on mean
reversion agrees that reversions in emerging markets take longer than that in developed
nations. It is worth mentioning that it has taken more than seven years (except Korea with
six) for the Crisis Five to approach to the mean. This journey is much longer than any
other emerging markets had ever taken (Giot 2003), which raises serious doubt on the
argument that global equity investors had overreacted (Michayluk and Neuhauser 2006),
and stock prices had overshot during the Asian crisis.
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5. Conclusions
This paper analyzes the Crisis Five’s stock and bond country indices during the
Asian financial crisis, and finds that none of the behavioral claims stand in Asian stock
markets. Changes of the Crisis Five’s stocks were mainly market responses to the
weakening microeconomic and financial sectors of the domestic economies. However,
the study cannot reject the possibility that there might be a mild panic or contagion in
Asian bond markets when Russia defaulted on its debt in 1998. One also observes
simultaneous increases in risk premiums to Asian bonds during the same time, which
further raise the interest to solve the long term debate of the direction of the volatility
spillover between Asia and Russia in 1998.
Investors’ behavior had their fair share in causing the Asian crisis. But they were
not the sole source or the fundamental cause of the crisis. Weaknesses in microeconomic
and financial sectors put Asian countries in a vulnerable zone, waiting for the crisis to
happen. Investors’ behavior provided the short-term trigger for the crisis but was not its
underlying cause. Easing investors’ sentiment and building their confidences are
important during the crisis. But the correct sequence of policy response is to first avoid
vulnerability, then to address behavioral issues, such as panic or contagion.
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Notes
Emerging Stock Markets Factbook 1998, P166
2
Emerging Stock Markets Factbook 1998, P206
3
http://www.slate.com/id/2090598/
4
5
http://education.yahoo.com/reference/dictionary/entry/contagion
See Dungey and Martin (2005a) for reviews of methodologies, and Forbes and Rigobon (2001) for
reviews of different definitions.
6
The similarity heuristic is a lesser-known psychological heuristic pertaining to how people make
judgments based on similarity. More specifically, the similarity heuristic is used to account for how people
make deductions, solve problems, and form biases based on similarity through comparison with past
experiences. From http://en.wikipedia.org/wiki/Similarity_heuristic
7
This phenomenon can also be explained by large current account balance, J-curve effect, and lacking of
sufficient stabilizing speculation during a crisis.
8
Monthly data 1990-2005, and daily data 1997-1998.
9
EMBI Global does not carry Indonesia.
10
Monthly data 1993-2005, and daily data 1997-1998. Malaysian daily data start from 1996/10/31, and
Thai daily data start from 1997/5/30.
11
In recursive least squares the equation is estimated repeatedly, using ever larger subsets of the sample
data. If there are k coefficients to be estimated in the b vector, then the first k observations are used to form
the first estimate of b. The next observation is then added to the data set and k+1 observations are used to
compute the second estimate of b. This process is repeated until all the T sample points have been used,
yielding T-k+1 estimates of the b vector.
12
See Brown, Durbin, and Evans (1975) or Johnston and DiNardo (1997, Table D.8) for a table of
significance lines for the CUSUM of squares test.
13
Baig and Goldfajn (2000) have challenged this view. They argued that higher volatilities are parts of the
crisis.
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The decline of Thai stock started at 1996. But the intention here is to study the behavior of financial
assets during 1997-1998, the decline period is therefore starts when Thai stock started to decline in the
beginning of 1997 (1/22/97).
15
Thai bond data starts from 5/30/1997.
16
Break points for Indonesian stock are 2/97, 7/97, 9/98, for Korean stock are 6/97, 12/98, 9/98, for
Malaysian stock are 2/97, 1/98, 9/98, for Philippine stock are 2/97, 7/97, 9/98, and for Thai stock are 7/98,
9/98.
17
http://www.pbs.org/wgbh/pages/frontline/shows/crash/etc/cron.html
18
Rational speculative attacks do not cause disequilibrium. On the contrary, they help prices go back to the
equilibrium.
19
Emerging Stock Markets Factbook 1998, P166
20
T statistics test the significance at 5 percent level.
21
Once again, Malaysian bond is the exception. It had decreasing correlations with all others during 1998.
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Dooley, M. and I. Shin (2000), ‘Private Inflows When Crises are Anticipated: A Case
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Table 1: Comparison of the Asian Crisis Five Indices with Benchmark Indices
Global
Composite
S&P
Indonesia
Korea
Malaysia
The
Philippines
Thailand
Average (90-05)
Standard
Deviation
(90-05)
0.53%1
0.78%
0.61%
0.83%
0.64%
0.34%
0.69%
4.15%
4.09%
13.28%
12.34%
9.77%
9.66%
12.12%
Average (97-98)
Standard
Deviation
(97-98)
-1.86%
2.03%
-4.35%
-0.55%
-3.97%
-2.97%
-3.42%
7.05%
4.17%
22.95%
17.47%
18.59%
15.46%
22.59%
Malaysia
The
Philippines
Thailand
Stock Indices
Bond Indices
Global
Composite
Average (93-05)
Standard
Deviation
(93-05)
0.98%
Average (97-98)
Standard
Deviation
(97-98)
Percentage
changes
(During
7/17/98-9/9/98,
2nd decline)
1
Korea
0.67%
0.76%
0.91%
0.74%
3.09%
3.57%
3.48%
4.42%
-0.01%
0.30%
-0.17%
0.36%
0.65%
5.28%
4.05%
6.49%
4.62%
5.78%
4.43%
6%
This is the average percentage change of MSCI AC WORLD Index.
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14%
7%
10%
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Table 2: Level Effects of EMDB Stock Indices during 1997-1998 (Daily)
First Decline Cycle
(1997/01/22-1998/01/23)
Thailand
Malaysia
The
Philippines
Indonesia
Korea
2
Entire Decline for stocks
(1997/01/22-1998/9/21)
Maximum
(1)
Minimum
(2)
Level
Effect
(3)=
(1)-(2)
Maximum
(1)
Minimum
(5)
Level
Effect
(6)=
(1)-(5)
97/01/22
(1053.97)
97/2/25
(503.04)
97/02/03
(5401.87)
98/01/12
(153.83)
98/01/12
(90.34)
98/01/09
(1366.07)
900.14
(85.4%2)
406.84
(80.88%)
4035.8
(75.04%)
97/01/22
(1053.97)
97/2/25
(503.04)
97/02/03
(5401.87)
98/09/03
(130.2)
98/09/01
(60.94)
98/09/11
(1043.12)
923.77
Level
Effect of
1st
Decline
% change
of 1st
Decline
to total
(7)=(3)/(6)
97.44%
442.10
93.35%
4358.75
92.59%
97/07/08
(150.91)
97/06/17
(509.18)
98/01/23
(14.24)
97/12/23
(113.15)
136.67
(90.56%)
396.03
(77.78%)
97/07/08
(150.91)
97/06/17
(509.18)
98/9/21
(9.79)
97/12/23
(113.15)
141.12
96.85%
396.03
100%
This is the percentage decrease of index returns.
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Table 3: Averages of Bond Indices during 1997-1998 (Daily)
Korea Malaysia The Philippines Thailand
118.90
102.37
129.71
101.95
116.77
102.39
134.13
90.67
1/2/96-10/2/97
10/3/97-1/9/98
(1st decline)
1/10/98-7/16/98 116.38
7/17/98-9/9/98
109.30
(2nd decline)
9/10/98-12/31/99 135.40
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99.72
85.59
140.94
131.02
97.60
87.37
102.90
148.65
112.63
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Table 4a: Simple Correlation Coefficients of All Indices
(Monthly, 1990-2005)
Stock-stock
correlations
1990-1996
Moderate
Bond-bond
1997-1998
Higher
(Higher during both decline
periods)
Lower
(Lower during the 1st
decline period except for
Thailand. Higher during the
2nd )
Negative ones had became
positive; positive ones had
increased
High
correlations
Stock-bond
correlations
Low to
moderate
(positive or
negative)
1999-2005
High
High
Higher than
those in and
positive
Table 4b: Simple Correlation Coefficients of All Indices (Monthly, 1990-2005)
1/9012/96
1/9712/98
1/9912/05
Indonesian Stock
KS MS PS TS
KB
MB
PB
0.5
0.5
0.5
0.4
0.7
0.8
0.8
0.9
1.0
0.9
0.9
0.4
0.5
0.1
0.9
0.9
0.4
0.9
0.0
0.6
0.7
Korean Stock
MS PS TS
KB
MB
PB
0.5
0.5
0.6
-0.5
-0.3
-0.6
0.2
0.9
0.9
0.9
0.6
0.6
0.2
0.4
0.5
0.9
0.3
0.9
0.3
0.7
0.8
0.6
TB
TB
Table 4b (Continue)
1/9012/96
1/9712/98
1/9912/05
Malaysian Stock
PS TS KB MB
PB
1.0
0.9
0.5
0.9
0.7
1.0
1.0
0.4
0.5
0.2
0.2
0.9
0.3
0.7
0.7
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Philippine Stock
TS KB MB
PB
0.9
0.2
0.7
0.5
0.4
1.0
0.4
0.5
0.2
0.6
0.3
-0.8
-0.4
-0.3
TB
39
TB
Thai Stock
KB MB PB
TB
-0.4
0.2
-0.4
0.5
0.5
0.5
0.2
0.4
-0.5
0.4
0.7
0.8
0.6
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Table 5: Simple Correlation Coefficients of All Indices
(Using Stock Decline Periods, 1997-1998 Daily Data)
1/1/971/21/97
1/22/971/23/98
(1st decline)
1/24/983/22/98
3/23/989/21/98
(2nd decline)
9/22/9812/31/98
KS
MS
Indonesian stock
PS TS KB MB
PB
MS
PS
Korean Stock
TS KB MB
PB
0.5
0.8
0.7
0.6
-0.4
-0.3
0.3
0.4
0.8
0.4
0.0
0.0
0.6
0.9
1.0
0.9
0.9
0.6
0.1
0.5
0.8
0.8
0.7
0.8
0.8
0.4
0.7
0.9
0.3
0.7
0.5
0.6
0.4
0.5
0.6
0.4
0.2
0.5
0.4
0.4
-0.1
0.3
0.3
0.9
0.8
0.8
0.9
0.6
0.6
0.4
0.6
0.8
0.7
0.9
0.6
0.5
0.4
0.6
0.9
0.9
0.9
0.9
1.0
1.0
1.0
0.9
0.9
0.9
0.7
0.9
0.9
0.9
0.9
TS
Philippine Stock
KB MB PB
TB
KB
0.5
-0.3
-0.3
0.3
TB
TB
Table 5 (Continue)
1/1/971/21/97
1/22/971/23/98
(1st decline)
1/24/983/22/98
3/23/989/21/98
(2nd decline)
9/22/9812/31/98
PS
Malaysian Stock
TS KB MB PB
0.7
0.8
-0.4
-0.3
0.0
1.0
1.0
0.5
-0.1
0.3
0.8
1.0
0.4
-0.2
0.3
0.8
0.9
0.7
0.4
0.9
0.8
0.9
0.9
0.1
0.9
1.0
0.7
0.6
0.5
0.7
0.9
0.8
0.9
0.8
1.0
1.0
1.0
1.0
0.9
1.0
June 24-26, 2007
Oxford University, UK
TB
40
Thai Stock
MB PB TB
0.0
0.0
0.3
0.8
0.5
-0.1
0.3
0.9
0.9
0.9
0.9
0.2
0.9
0.9
0.9
0.7
0.9
0.7
0.7
0.5
0.8
1.0
1.0
0.9
0.9
0.8
0.9
0.8
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Table 6: Simple Correlation Coefficients of All Indices
(Using Bond Decline Periods,1997-1998 Daily Data)
1/1/9710/2/97
10/3/971/9/98
(1st decline)
1/10/987/16/98
7/17/989/9/98
(2nd decline)
9/10/9812/31/98
Korean Bond
PS
TS MB
PB
TB
IS
KS
Malaysian Bond
MS PS
TS
1.0
0.9
0.4
-0.4
0.4
-0.7
-0.7
-0.7
0.9
0.7
0.9
0.7
0.4
0.7
0.7
0.8
0.8
0.7
0.8
0.6
0.8
0.8
0.7
0.4
0.7
0.9
0.8
0.8
0.8
0.6
0.8
-0.2
0.2
0.4
0.9
0.8
0.9
1.0
1.0
0.8
0.7
0.2
0.9
0.8
1.0
0.9
0.9
1.0
0.9
1.0
1.0
1.0
1.0
0.9
1.0
1.0
0.9
1.0
1.0
IS
KS
MS
-0.5
0.3
-0.7
-0.7
-0.7
0.9
0.9
0.8
0.8
0.6
0.4
0.6
0.7
0.7
0.9
0.9
Table 6 (Continue)
1/1/97-10/2/97
10/3/97-1/9/98
(1st decline)
1/10/98-7/16/98
7/17/98-9/9/98
(2nd decline)
9/10/98-12/31/98
June 24-26, 2007
Oxford University, UK
Philippine Bond
KS MS PS
TS
0.5 -0.6 -0.7 -0.7
TB
0.6
IS
0.5
Thai Bond
KS MS PS
0.5 0.4 0.4
TS
0.6
0.2
0.0
0.4
-0.2
0.4
0.1
0.4
0.5
0.5
0.1
0.8
0.8
0.5
0.4
0.6
0.2
0.6
0.5
0.7
0.8
0.7
0.5
0.8
1.0
0.7
0.9
0.4
0.9
0.9
1.0
0.9
0.9
1.0
1.0
0.7
0.9
0.8
0.9
0.5
0.9
0.9
0.9
0.9
0.9
IS
-0.3
41
PB
TB
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Table7: VAR Residual Correlation Coefficients of All Indices
(Using Stock Decline Periods, 1997-1998 Daily Data)
1/1/9712/31/98
1/22/971/23/98
(1st decline)
1/24/983/22/98
3/23/989/21/98
(2nd decline)
9/22/9812/31/98
TB
KB
Indonesian Stock
PB MB MS TS
PS
KS
TB
KB
Korean Stock
PB MB MS
TS
PS
0.0
0.1
0.0
-0.1
0.4
0.2
0.4
0.1
0.2
0.2
0.2
0.0
0.2
0.2
0.1
0.0
0.1
0.0
-0.2
0.4
0.2
0.4
0.1
0.2
0.2
0.2
0.1
0.2
0.1
0.1
0.4
0.3
0.4
-0.2
0.6
0.7
0.5
0.1
0.2
0.2
0.3
0.0
0.2
0.4
0.2
0.0
0.1
0.1
0.0
0.4
0.4
0.4
0.3
0.0
0.1
0.0
0.0
0.4
0.4
0.3
0.3
0.3
0.1
0.2
0.2
0.4
0.2
0.1
0.0
0.3
0.1
-0.1
0.1
0.3
0.0
Table 7 (Continue)
Malaysian Stock
KB PB MB TS
PS
TB
Philippine Stock
KB PB MB TS
Thai Stock
TB KB PB
0.2
0.1
0.1
-0.1
0.3
0.3
0.1
0.1
0.1
0.0
0.2
0.1
0.1
0.1
0.0
0.1
0.0
0.0
0.0
0.1
0.3
0.1
0.0
0.0
-0.1
0.1
0.1
0.0
0.0
-0.1
0.4
0.0
0.3
-0.2
0.5
0.4
0.1
0.0
0.0
-0.1
0.1
0.5
0.4
0.5
0.1
0.2
0.3
0.1
0.0
0.5
0.3
0.1
0.2
0.2
0.1
0.5
0.1
0.3
0.1
0.1
-0.1
0.1
0.1
0.1
0.3
0.0
0.1
0.0
0.0
0.2
0.4
0.1
0.2
0.1
0.0
TB
1/1/9712/31/98
1/22/971/23/98
(1st decline)
1/24/983/22/98
3/23/989/21/98
(2nd decline)
9/22/9812/31/98
June 24-26, 2007
Oxford University, UK
42
MB
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Table 8: VAR Residual Correlation Coefficients of All Indices
(Using Bond Decline Periods, 1997-1998 Daily Data)
1/1/9710/2/97
10/3/971/9/98
(1st decline)
1/10/987/16/98
7/17/989/9/98
(2nd decline)
9/10/9812/31/98
IS
KS
Korean Bond
MS PS
TS MB
-0.1
-0.1
0.0
-0.3
0.0
0.8
0.4
0.6
-0.2
0.0
0.0
-0.2
0.2
0.2
0.1
0.2
0.1
0.3
0.3
0.7
-0.1
0.2
0.0
0.2
0.3
0.2
0.3
0.3
0.2
0.3
0.3
-0.2
0.1
0.1
-0.1
0.1
0.3
0.3
0.3
0.8
0.8
0.2
0.2
0.2
0.2
0.0
0.2
0.3
0.4
0.4
0.2
PB
TB
IS
KS
Malaysian Bond
MS PS
TS
PB
TB
0.0
0.3
0.6
0.0
-0.1
0.4
0.7
0.0
0.1
0.0
0.1
0.4
-0.1
-0.1
0.0
0.3
0.3
0.1
-0.1
0.2
0.1
0.0
0.1
0.2
Table 8 (Continue)
1/1/97-10/2/97
10/3/97-1/9/98
(1st decline)
1/10/98-7/16/98
7/17/98-9/9/98
(2nd decline)
9/10/98-12/31/98
June 24-26, 2007
Oxford University, UK
IS
0.2
Philippine Bond
KS MS PS TS
0.0 0.3 0.2 0.0
TB
0.4
IS
-0.1
Thai Bond
KS MS PS
0.0 0.2 0.0
TS
0.0
-0.1
0.4
0.4
0.1
0.0
0.3
0.0
0.3
0.0
0.3
0.4
0.2
0.0
0.1
0.3
0.1
0.1
0.3
0.1
0.2
0.1
0.2
0.0
0.1
-0.1
0.1
0.0
0.1
0.2
0.1
0.1
0.1
0.7
0.1
0.1
0.2
0.0
0.0
0.1
0.0
0.3
0.0
0.1
0.1
43
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Table 9: Comparison of Correlation Coefficients of Four Bond Indices
(1993-2005 VS. 1997-1998)
Korean Bond
Korean Bond
1
Malaysian Bond 0.49
Philippine Bond 0.63
Thai Bond
0.83
Malaysian Bond
0.98
1
0.65
0.34
Philippine Bond
0.98
0.98
1
0.79
Thai Bond
0.99
0.98
0.95
1
Values in lower triangle are correlation coefficients during 1997-1998, while values in
upper triangle are for 1993-2005.
June 24-26, 2007
Oxford University, UK
44
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Table 10: VAR Residual Correlation Coefficients during the 1st and 2nd Decline Period
for Bond Indices
Korean bond
Korean bond
1
Malay bond
0.34
Philippine bond 0.28
Thai bond
0.68
Malay bond
0.25
1
0.38
0.65
Philippine bond
0.83
0.26
1
0.41
Thai bond
0.85
0.13
0.69
1
Values in upper triangle are correlation coefficients during 7/17/98-9/9/98, while values
in lower triangle are for 10/3/97-1/9/98.
June 24-26, 2007
Oxford University, UK
45
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Table 11a: Averages of Crisis Five's Stock Indices (1990-2005)
Stocks
Averages MSCI AC World Indonesia Korea Malaysia
90-96
140
100
599
293
97-98
236
66
287
226
99-05
263
37
554
197
2005
289
66
965
253
12/05
310
71
1245 257
The Philippines
3128
2738
1443
1705
1913
Thailand
1117
427
373
606
632
90-05
2342
705
209
June 24-26, 2007
Oxford University, UK
68
541
46
242
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Table 11b: Averages of Crisis Five's Bond Indices (1990-2005)
Averages EMBI
Composite
90-96
98
97-98
150
99-05
232
2005
331
12/05
350
90-05
3
184
Bonds3
Korea Malaysia The Philippine Thailand
106
119
178
216
(4/04)
145
101
97
162
211
215
105
136
218
305
337
97
159
190
193
147
176
147
Bond data starts from 12/93.
June 24-26, 2007
Oxford University, UK
47
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Figure 1: Structural Breaks from Descriptive Analyses
Malaysian Bond
110.00
105.00
96.56
(7/22/98)
100.00
106.01
(10/3/97)
95.00
90.00
85.00
80.00
75.00
70.00
Thai Bond
9/2/1998
11/2/1998
7/2/1998
3/2/1998
1/2/1998
Philippine Bond
115.00
101.26
(10/6/97)
110.00
11/2/1997
9/2/1997
7/2/1997
5/2/1997
3/2/1997
1/2/1997
60.00
5/2/1998
63.64
(9/9/98)
65.00
97.25
(7/31/98)
105.00
143.84
(7/17/98)
150.00
145.00
100.00
140.00
95.00
135.00
90.00
130.00
140.43
(10/16/97)
131.28
(1/9/98)
125.00
85.00
120.00
80.00
115.00
48
11/2/1998
9/2/1998
7/2/1998
3/2/1998
1/2/1998
11/2/1997
9/2/1997
7/2/1997
5/2/1997
12/2/1998
11/2/1998
9/2/1998
8/2/1998
10/2/1998
7/2/1998
6/2/1998
5/2/1998
4/2/1998
3/2/1998
2/2/1998
1/2/1998
12/2/1997
11/2/1997
9/2/1997
10/2/1997
8/2/1997
7/2/1997
6/2/1997
5/2/1997
4/2/1997
3/2/1997
2/2/1997
1/2/1997
70.00
June 24-26, 2007
Oxford University, UK
111.74
(9/4/98)
110.00
5/2/1998
74.76
(8/27/98)
1/2/1997
75.00
3/2/1997
76.54
(12/22/97)
June 24-26, 2007
Oxford University, UK
153.83
(1/12/98)
1200.00
1053.97
(1/22/97)
Thai Stock
1000.00
800.00
600.00
400.00
386.97
(3/23/98)
200.00
0.00
130.20
(9/3/98)
49
12/1/1998
Philippine Stock
5000.00
4000.00
2528.33
(3/25/98)
2000.00
11366.07
(1/9/98)
0.00
1043.12
(9/11/98)
12/1/1998
11/1/1998
10/1/1998
9/1/1998
8/1/1998
7/1/1998
6/1/1998
5/1/1998
4/1/1998
3/1/1998
2/1/1998
1/1/1998
12/1/1997
11/1/1997
10/1/1997
9/1/1997
8/1/1997
7/1/1997
6/1/1997
90.34
(1/12/98)
11/1/1998
10/1/1998
9/1/1998
8/1/1998
7/1/1998
6/1/1998
3000.00
5/1/1998
231.83
(3/23/98)
4/1/1998
3/1/1998
2/1/1998
1000.00
1/1/1998
5401.87
(2/3/1997)
12/1/1997
0.00
5/1/1997
14.24
(1/23/98)
11/1/1997
1127.09
(9/21/98)
4/1/1997
Indonesian Stock
10/1/1997
200.00
9/1/1997
400.00
8/1/1997
509.18
(6/17/97)
7/1/1997
6000.00
6/1/1997
korean Stock
3/1/1997
0
5/1/1997
140
4/1/1997
9.79
(9/21/98)
2/1/1997
33.18
(3/27/98)
3/1/1997
80
1/1/1997
150.13
(2/13/97)
2/1/1997
12/1/1998
11/1/1998
10/1/1998
9/1/1998
8/1/1998
7/1/1998
6/1/1998
5/1/1998
160
1/1/1997
12/1/1998
11/1/1998
10/1/1998
113.15
(12/23/97)
12/1/1998
9/1/1998
8/1/1998
7/1/1998
6/1/1998
4/1/1998
40
11/1/1998
10/1/1998
9/1/1998
8/1/1998
7/1/1998
5/1/1998
3/1/1998
2/1/1998
1/1/1998
12/1/1997
11/1/1997
10/1/1997
9/1/1997
8/1/1997
7/1/1997
6/1/1997
5/1/1997
4/1/1997
3/1/1997
2/1/1997
60
6/1/1998
4/1/1998
3/1/1998
2/1/1998
1/1/1998
12/1/1997
11/1/1997
300.00
5/1/1998
4/1/1998
3/1/1998
2/1/1998
1/1/1998
600.00
12/1/1997
10/1/1997
100.00
11/1/1997
9/1/1997
8/1/1997
7/1/1997
6/1/1997
5/1/1997
4/1/1997
3/1/1997
1/1/1997
20
10/1/1997
9/1/1997
8/1/1997
7/1/1997
6/1/1997
5/1/1997
4/1/1997
3/1/1997
500.00
2/1/1997
1/1/1997
120
2/1/1997
1/1/1997
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
600.00
503.04
(2/25/97)
Malaysian Stock
500.00
100
400.00
300.00
200.00
186.47
(3/23/98)
100.00
0.00
60.94
(9/1/98)
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Figure 2: Structural Breaks from the CUSUM of Squares Test
Korean Bond
Malaysian Bond
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
97M07 97M10 98M01 98M04 98M07 98M10
-0.2
97M07 97M10 98M01 98M04 98M07 98M10
CUSUM of Squares
5% Significance
CUSUM of Squares
5% Significance
Philippine Bond
Thai Bond
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
97M07 97M10 98M01 98M04 98M07 98M10
-0.2
97M07 97M10 98M01 98M04 98M07 98M10
CUSUM of Squares
5% Significance
CUSUM of Squares
5% Significance
June 24-26, 2007
Oxford University, UK
50
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Indonesian Stock
Korean Stock
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
-0.2
1997M07
1998M01
1997M07
1998M07
1998M07
CUSUM of Squares
5% Significance
CUSUM of Squares
5% Significance
Malaysian Stock
Philippine Stock
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
-0.2
1998M01
-0.2
1997M07
1998M01
1998M07
1997M07
CUSUM of Squares
5% Significance
Thai Stock
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
1998M01
1998M07
CUSUM of Squares
5% Significance
June 24-26, 2007
Oxford University, UK
1998M07
CUSUM of Squares
5% Significance
1.2
1997M07
1998M01
51
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Figure 3: EMDB Crisis Five Stock Indices (Monthly, 1990M01-2005M12)
Indonesia
Korea
Malaysia
The Philippines
Thailand
EMDB Crisis Five Stock Indices (Monthly 90-05)
5500
4500
3500
2500
1500
500
June 24-26, 2007
Oxford University, UK
52
2005M07
2005M01
2004M07
2004M01
2003M07
2003M01
2002M07
2002M01
2001M07
2001M01
2000M07
2000M01
1999M07
1999M01
1998M07
1998M01
1997M07
1997M01
1996M07
1996M01
1995M07
1995M01
1994M07
1994M01
1993M07
1993M01
1992M07
1992M01
1991M07
1991M01
1990M07
1990M01
-500
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Figure 4: EMDB Crisis Five Stock Indices Standard4
Indonesia
korea
Malaysia
The Philippines
Thailand
EMDB Crisis Five Stock Indices Standard (Daily, 1997/01/01-1998/12/31)
120
100
80
60
40
20
4
All indices are standardized with 1997/01/01 as 100.
June 24-26, 2007
Oxford University, UK
53
12/1/1998
11/1/1998
10/1/1998
9/1/1998
8/1/1998
7/1/1998
6/1/1998
5/1/1998
4/1/1998
3/1/1998
Daily
2/1/1998
1/1/1998
12/1/1997
11/1/1997
10/1/1997
9/1/1997
8/1/1997
7/1/1997
6/1/1997
5/1/1997
4/1/1997
3/1/1997
2/1/1997
1/1/1997
0
2007 Oxford Business & Economics Conference
Figure 5:
ISBN : 978-0-9742114-7-3
EMBI Four Asian Bond Indices (Monthly, 1993M12-2005M12)
EMBI Four Asian Bonds Indices (Monthly, 93-05)
350
South Korea
Malaysia
The Philippines
Thailand
300
250
200
150
100
n9
De 4
c94
Ju
n9
De 5
c95
Ju
n9
De 6
c96
Ju
n9
De 7
c97
Ju
n9
De 8
c98
Ju
n9
De 9
c99
Ju
n0
De 0
c00
Ju
n0
De 1
c01
Ju
n0
De 2
c02
Ju
n0
De 3
c03
Ju
n0
De 4
c04
Ju
n0
De 5
c05
Ju
De
c93
50
Month
June 24-26, 2007
Oxford University, UK
54
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Figure 6: EMBI Four Asian Bond Indices (Daily, 1997/01/01-1998/12/31)
EMBI Four Asian Bond Indices (Daily, 1997/1/1-1998/12/31)
150.00
SOUTH KOREA
MALAYSIA
THE PHILIPPINES
THAILAND
140.00
130.00
120.00
110.00
100.00
90.00
80.00
70.00
1/
2/
19
97
2/
2/
19
9
3/
2/ 7
19
97
4/
2/
19
9
5/
2/ 7
19
97
6/
2/
19
9
7/
2/ 7
19
97
8/
2/
19
97
9/
2/
19
10
97
/2
/1
11 997
/2
/1
12 997
/2
/1
99
7
1/
2/
19
9
8
2/
2/
19
9
3/
2/ 8
19
98
4/
2/
19
9
5/
2/ 8
19
98
6/
2/
19
9
7/
2/ 8
19
98
8/
2/
19
98
9/
2/
19
10
98
/2
/1
11 998
/2
/1
12 998
/2
/1
99
8
60.00
daily
June 24-26, 2007
Oxford University, UK
55
2007 Oxford Business & Economics Conference
ISBN : 978-0-9742114-7-3
Figure 7: Percentage Changes of EMBI Bond Indices (1997-1998, Daily)
COMPOSITE_BOND
Percentage Changes of Bond Indices (1997-1998, Daily)
KOREAN_BOND
MALAYSIAN_BOND
PHILIPPINE_BOND
THAI_BOND
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
-20.00%
Jan- Feb- Mar- Apr- May- Jun97
97
97
97
97
97
June 24-26, 2007
Oxford University, UK
Jul97
Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun97
97
97
97
97
98
98
98
98
98
98
56
Jul98
Aug- Sep- Oct- Nov- Dec98
98
98
98
98