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Diversification, rationality and the Asian economic crisis

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  • Bowman, Robert G.
  • Chan, Kam Fong
  • Comer, Matthew R.
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    Abstract

    We examine the reaction of world equity markets to the 1997 Asian Crisis. Correlations across the markets increased dramatically during the economic crisis but only during a relatively short period around the crisis. After the crisis, the benefits of international diversification improved substantially but did not return to the levels existing before the crisis. We then examine whether the market reactions to the crisis can be explained by economic fundamentals. We find that virtually all of the variation in returns across markets can be explained by these factors. The reaction of markets to the Asian Crisis was rational.

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    Bibliographic Info

    Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

    Volume (Year): 18 (2010)
    Issue (Month): 1 (January)
    Pages: 1-23

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    Handle: RePEc:eee:pacfin:v:18:y:2010:i:1:p:1-23

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    Web page: http://www.elsevier.com/locate/pacfin

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    Keywords: Asian Crisis Contagion Economic fundamentals International diversification;

    References

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    1. Reuven Glick & Andrew K. Rose, 1998. "Contagion and trade: why are currency crises regional?," Pacific Basin Working Paper Series 98-03, Federal Reserve Bank of San Francisco.
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    5. Bracker, Kevin & Docking, Diane Scott & Koch, Paul D., 1999. "Economic determinants of evolution in international stock market integration," Journal of Empirical Finance, Elsevier, vol. 6(1), pages 1-27, January.
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    7. Simon Johnson & Peter Boone & Alasdair Breach & Eric Friedman, 1999. "Corporate Governance in the Asian Financial Crisis," William Davidson Institute Working Papers Series 297, William Davidson Institute at the University of Michigan.
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    9. Kho, Bong-Chan & Stulz, Rene M., 2000. "Banks, the IMF, and the Asian crisis," Pacific-Basin Finance Journal, Elsevier, vol. 8(2), pages 177-216, May.
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    16. Van Rijckeghem, Caroline & Weder, Beatrice, 2001. "Sources of contagion: is it finance or trade?," Journal of International Economics, Elsevier, vol. 54(2), pages 293-308, August.
    17. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
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    19. Caporale, Guglielmo Maria & Cipollini, Andrea & Spagnolo, Nicola, 2005. "Testing for contagion: a conditional correlation analysis," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 476-489, June.
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    Cited by:
    1. Chiang, Shu-Mei & Chen, Hsin-Fu & Lin, Chi-Tai, 2013. "The spillover effects of the sub-prime mortgage crisis and optimum asset allocation in the BRICV stock markets," Global Finance Journal, Elsevier, vol. 24(1), pages 30-43.
    2. Chan, Kam Fong & Treepongkaruna, Sirimon & Brooks, Robert & Gray, Stephen, 2011. "Asset market linkages: Evidence from financial, commodity and real estate assets," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1415-1426, June.

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