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Dynamic Effects of Currency Depreciation on Stock Market Returns during the Asian Financial Crisis

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Author Info
WenShwo Fang (Feng Chia University)
Stephen M. Miller (University of Nevada and University of Connecticut)

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Abstract

The current international integration of financial markets provides a channel for currency depreciation to affect stock prices. Moreover, the recent financial crisis in Asia with its accompanying exchange rate volatility affords a case study to examine that channel. This paper applies a bivariate GARCH-M model of the reduced form of stock market returns to investigate empirically the effects of daily currency depreciation on stock market returns for five newly emerging East Asian stock markets during the Asian financial crisis. The evidence shows that the conditional variances of stock market returns and depreciation rates exhibit time-varying characteristics for all countries. Domestic currency depreciation and its uncertainty adversely affects stock market returns across countries. The significant effects of foreign exchange market events on stock market returns suggest that international fund managers who invest in the newly emerging East Asian stock markets must evaluate the value and stability of the domestic currency as a part of their stock market investment decisions.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2002-31.

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Length: 30 pages
Date of creation: Oct 2002
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Handle: RePEc:uct:uconnp:2002-31

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Related research
Keywords: Asian financial crisis stock market returns currency depreciation bivariate GARCH-M

Find related papers by JEL classification:
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  3. Lee, Jaewoo, 1999. "The Effect of Exchange Rate Volatility on Trade in Durables," Review of International Economics, Blackwell Publishing, vol. 7(2), pages 189-201, May.
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  6. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
  7. Chou, Ray Yeutien, 1988. "Volatility Persistence and Stock Valuations: Some Empirical Evidence Using Garch," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(4), pages 279-94, October-D. [Downloadable!] (restricted)
  8. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
  9. Kroner, Kenneth F. & Lastrapes, William D., 1993. "The impact of exchange rate volatility on international trade: Reduced form estimates using the GARCH-in-mean model," Journal of International Money and Finance, Elsevier, vol. 12(3), pages 298-318, June. [Downloadable!] (restricted)
  10. Baillie, Richard T. & Bollerslev, Tim, 1990. "A multivariate generalized ARCH approach to modeling risk premia in forward foreign exchange rate markets," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 309-324, September. [Downloadable!] (restricted)
  11. Jiang, Christine & Chiang, Thomas C, 2000. "Do Foreign Exchange Risk Premiums Relate to the Volatility in the Foreign Exchange and Equity Markets?," Applied Financial Economics, Taylor and Francis Journals, vol. 10(1), pages 95-104, February. [Downloadable!] (restricted)
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  1. Vance L. Martin & Mardi Dungey, 2007. "Unravelling financial market linkages during crises," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 89-119. [Downloadable!]
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