Derivatives and Global Capital Flows: Applications to Asia
There are four factors involved in the current financial crisis in Asia that have caused surprise. Since the Latin American debt crisis was thought to have been aggravated by the dominance of syndicated private bank lending, borrowers were encouraged to increase private direct investment flows. The stability of capital flows to Asia was used as an example. Yet, the Asian crisis appears to have been precipitated by the reversal of short-term private bank lending. Second, the flows of capital to Asia have been used as example of the benefits of free international capital markets in directing resources to the most productive uses. Yet, in the aftermath of the crisis it appears that total returns on equity investments in Asia have in fact been lower than in most other regions throughout the 1 990s. Third, it appears that in a number of Asian countries, the majority of the international lending was between foreign and domestic banks. It has been suggested that the major cause of the crisis is unsafe lending practices by the Asian banks permitted by inadequate national prudential supervision. Yet, these economies were the most advanced on the road to market liberalisation. One of the cardinal principles of financial liberalisation, formed in the aftermath of the Chilean crisis, is that the creation of institutional structures ensuring the stability of the financial system should precede financial market liberalisation. Indeed, many countries were following this advice. It is interesting to note that the lending banks were generally large, global banks who employ highly sophisticated risk assessment procedures. Yet, they appear to have continued lending well after the increased risks in the region were generally apparent. This suggests that even the most sophisticated operators in global financial markets have difficulties in assessing risk, and that their regulators were no more successful in imposing prudent limits. Finally, private portfolio and direct investment flows
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- 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-.
- 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.
- Stephen J. Brown & William N. Goetzmann & James Park, 1998. "Hedge Funds and the Asian Currency Crisis of 1997," NBER Working Papers 6427, National Bureau of Economic Research, Inc.
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