Creditor Moral Hazard in Equity Markets: A Theoretical Framework and Evidence from Indonesia and Korea
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.
|Date of creation:||01 Feb 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 734 763-5020
Fax: 734 763-5850
Web page: http://www.wdi.umich.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sarno, Lucio & Taylor, Mark P., 1999. "Moral hazard, asset price bubbles, capital flows, and the East Asian crisis:: the first tests," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 637-657, August.
- Przeworski, Adam & Vreeland, James Raymond, 2000. "The effect of IMF programs on economic growth," Journal of Development Economics, Elsevier, vol. 62(2), pages 385-421, August.
- French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
- 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.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
- Steven Phillips & Timothy D. Lane, 2000. "Does IMF Financing Result in Moral Hazard?," IMF Working Papers 00/168, International Monetary Fund.
- John Krainer, 2002. "Stock market volatility," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct25.
- Hayo, Bernd & Kutan, Ali M., 2005. "IMF-related news and emerging financial markets," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1126-1142, November.
- Topol, Richard, 1991. "Bubbles and Volatility of Stock Prices: Effect of Mimetic Contagion," Economic Journal, Royal Economic Society, vol. 101(407), pages 786-800, July.
- Evrensel, Ayse Y., 2002. "Effectiveness of IMF-supported stabilization programs in developing countries," Journal of International Money and Finance, Elsevier, vol. 21(5), pages 565-587, October.
When requesting a correction, please mention this item's handle: RePEc:wdi:papers:2004-659. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laurie Gendron)
If references are entirely missing, you can add them using this form.