International Transmission of Stock Market Movements
An Empirical Analysis of the Asian Financial Crisis

Abstract

Amidst the overreaction and herding behavior in the East Asian stock markets during the Asian financial crisis (1997 - 1998), there was evidence to suggest that there were significant spillovers to developed markets. This is contrary to numerous literatures, which argued that only an asymmetric relationship exists between the developed and Asian markets. Furthermore, one questions whether the markets, during this time period, were incorporating all the information available quickly. These observations instigated this study. The paper analyses the Asian financial crisis (1997 - 1998) and the impact it has on the developed markets. We use daily stock market returns, from the period March 1995 to December 1999 for nine countries: US, Canada, London, Japan, Korea, Indonesia, Thailand, Malaysia and Philippines, to estimate a nine variable VAR system to determine and explain the relationships among these stock markets. Variance decompositions and impulse response functions were generated to analyze the impact of an innovation in an Asian market on the developed markets and by extension we tried to determine whether the markets were informationally efficient. We found that the markets were efficient for the pre-crisis and entire sample periods, but were uncertain for during the crisis and post crisis periods. There were also evidence of intra-regional as opposed to inter-regional relationships and the correlation of the markets did not increase after the crisis. Furthermore, the Asian markets were the dominant influence in foreign markets in the 'during' and 'post crisis' periods.

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