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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. Stephen J. Brown & William N. Goetzmann & James M. Park, 1998. "Hedge Funds and the Asian Currency Crisis of 1997," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-014, New York University, Leonard N. Stern School of Business-.
  2. 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.
  3. Frankel, Jeffrey A. & Schmukler, Sergio L., 1998. "Country funds and asymmetric information," Policy Research Working Paper Series 1886, The World Bank.
  4. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
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  6. 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.
  7. Geert Bekaert & Michael S. Urias, 1995. "Diversification, Integration and Emerging Market Closed-End Funds," NBER Working Papers 4990, National Bureau of Economic Research, Inc.
  8. 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.
  9. 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.
  10. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, 04.
  11. 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.
  12. Gikas A. Hardouvelis & Rafael La Porta & Thierry A. Wizman, 1993. "What moves the discount on country equity funds?," Research Paper 9324, Federal Reserve Bank of New York.
  13. 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.
  14. Froot, Kenneth A. & O'Connell, Paul G. J. & Seasholes, Mark S., 2001. "The portfolio flows of international investors," Journal of Financial Economics, Elsevier, vol. 59(2), pages 151-193, February.
  15. 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.
  16. Jeffrey Frankel & Sergio Schmukler, 1996. "Country fund discounts and the mexican crisis of December 1994: Did local residents turn pessimistic before international investors?," Open Economies Review, Springer, vol. 7(1), pages 511-534, March.
  17. 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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