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 associated with the own country and with other countries to our models, we are able to predict the expected change in investor behavior and its effect on stock returns. Using daily stock returns for Indonesia and Korea, we test the ability of the models to predict the expected changes in stock returns on the days of IMF-related news such as program negotiations and program approval. Our results regarding Korea and, to a lesser extent, Indonesia are consistent with the creditor moral hazard models that assume implicit guarantees and asset price bubbles. Our results show that, if there is creditor moral hazard in equity markets, its duration could be measured only by days, suggesting that creditor moral hazard is a short-term phenomenon.
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Length: 24 pages Date of creation: 01 Feb 2004 Date of revision: Handle: RePEc:wdi:papers:2004-659
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Find related papers by JEL classification: F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F34 - International Economics - - International Finance - - - International Lending and Debt Problems
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De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990.
"Noise Trader Risk in Financial Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 98(4), pages 703-38, August.
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