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

  • Eli M Remolona
  • Benjamin H. Cohen

    (International Monetary Fund (IMF))

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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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 97.

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Length: 58 pages
Date of creation: Dec 2000
Date of revision:
Handle: RePEc:bis:biswps:97
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  1. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
  2. Kenneth A. Froot & Paul G.J. O'Connell & Mark S. Seasholes, 1998. "The Portfolio Flows of International Investors, I," NBER Working Papers 6687, National Bureau of Economic Research, Inc.
  3. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
  4. Frankel, Jeffrey A & Schmukler, Sergio L, 2000. "Country Funds and Asymmetric Information," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 5(3), pages 177-95, July.
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  7. Jeffrey A. Frankel & Sergio L. Schmukler, 1996. "Country fund discounts and the Mexican crisis of December 1994: did local residents turn pessimistic before international investors?," International Finance Discussion Papers 563, Board of Governors of the Federal Reserve System (U.S.).
  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.
  9. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis.
  10. Lin, Wen-Ling & Engle, Robert F & Ito, Takatoshi, 1994. "Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 507-38.
  11. 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.
  12. 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.
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  14. 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.
  15. 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.
  16. Engle, Robert F & Ito, Takatoshi & Lin, Wen-Ling, 1990. "Meteor Showers or Heat Waves? Heteroskedastic Intra-daily Volatility in the Foreign Exchange Market," Econometrica, Econometric Society, vol. 58(3), pages 525-42, May.
  17. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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