Diversification, Rationality and the Asian Economic Crisis
Posted: 9 Aug 2009 Last revised: 5 Jan 2011
Date Written: August 6, 2009
We examine the reaction of world equity markets to the 1997 Asian Crisis. Correlations across the markets increased dramatically during the economic crisis but only during a relatively short period around the crisis. After the crisis, the benefits of international diversification improved substantially but did not return to the levels existing before the crisis. We then examine whether the market reactions to the crisis can be explained by economic fundamentals. We find that virtually all of the variation in returns across markets can be explained by these factors. The reaction of markets to the Asian Crisis was rational.
Keywords: Asian Crisis, Contagion, Economic fundamentals, International diversification
JEL Classification: G11, G15, G34, F40
Suggested Citation: Suggested Citation