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Information flows during the Asian crisis: evidence from closed-end funds

In: Market liquidity: proceedings of a workshop held at the BIS

  • Benjamin H Cohen

    (Bank for International Settlements)

  • Eli M Remolona

    (Bank for International Settlements)

A salient feature of the Asian crisis of 1997 was a collapse of stock markets that took place over several months. The dynamics of this collapse raises the question of what information was driving the markets. This paper examines a key aspect of this question: did information flow from the domestic Asian markets to overseas markets, or vice versa? We test for the direction of this information flow by comparing daily returns in several Southeast Asian equity markets with daily returns on US-based closed-end funds that invest in those markets, exploiting the fact that there is no overlap between the trading hours in the two regions. We find that while information flows between local and US markets tended to be roughly evenly balanced before the crisis, US market returns assumed a more important role during the crisis. This is the case both for the level of daily returns and for the volatility of those returns. We also find that fund returns were more closely tied to broad US market returns during the crisis period. This suggests that the shift in causation between the US and Asia reflected a greater role for US market sentiment, rather than for the news that became known during US trading hours.

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This chapter was published in:
  • Bank for International Settlements, 2001. "Market liquidity: proceedings of a workshop held at the BIS," BIS Papers, Bank for International Settlements, number 02, April.
  • This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 02-03.
    Handle: RePEc:bis:bisbpc:02-03
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    1. Choe, Hyuk & Kho, Bong-Chan & Stulz, Rene M., 1999. "Do foreign investors destabilize stock markets? The Korean experience in 1997," Journal of Financial Economics, Elsevier, vol. 54(2), pages 227-264, October.
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    8. Stephen Brown & William Goetzmann & James Park, 1998. "Hedge Funds and the Asian Currency Crisis of 1997," Yale School of Management Working Papers ysm84, Yale School of Management, revised 01 Apr 2008.
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    10. Gikas Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1994. "What Moves the Discount on Country Equity Funds?," NBER Chapters, in: The Internationalization of Equity Markets, pages 345-403 National Bureau of Economic Research, Inc.
    11. Glosten, Lawrence R & Jagannathan, Ravi & Runkle, David E, 1993. " On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks," Journal of Finance, American Finance Association, vol. 48(5), pages 1779-1801, December.
    12. Geert Bekaert & Michael S. Urias, 1995. "Diversification, Integration and Emerging Market Closed-End Funds," NBER Working Papers 4990, National Bureau of Economic Research, Inc.
    13. Robert F. Engle & Takatoshi Ito & Wen-Ling Lin, 1988. "Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market," NBER Working Papers 2609, National Bureau of Economic Research, Inc.
    14. Ramon Moreno & Gloria Pasadilla & Eli Remolona, 1998. "Asia's financial crisis: lessons and policy responses," Pacific Basin Working Paper Series 98-02, Federal Reserve Bank of San Francisco.
    15. Pan, Ming-Shiun & Chan, Kam c & Wright, David J, 2001. "Divergent Expectations and the Asian Financial Crisis of 1997," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(2), pages 219-38, Summer.
    16. Charles Frederick Kramer & T. Todd Smith, 1995. "Recent Turmoil in Emerging Markets and the Behavior of Country-Fund Discounts: Renewing the Puzzle of the Pricing of Closed-End Mutual Funds," IMF Working Papers 95/68, International Monetary Fund.
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