Divergent Expectations and the Asian Financial Crisis of 1997

Posted: 13 May 2000

See all articles by Ming-Shiun Pan

Ming-Shiun Pan

Shippensburg University - Department of Finance and Management Information & Analysis

Kam C. Chan

Western Kentucky University - Department of Accounting and Finance

David J. Wright

Department of Business

Abstract

An important question concerning integration of global financial markets is whether local investors in an equity market react differently from international investors, particularly during periods of financial crisis. Considering local investors are closer to information, they might turn pessimistic before foreign investors prior to a crisis. We examine whether local investors in each of the six Asian stock markets, including Indonesia, Korea, Malaysia, the Philippines, Taiwan, and Thailand, reacted differently from international investors during the 1997 Asian financial crisis. Our empirical results indicate that, in general, closed-end country fund share prices (mainly driven by foreign investors) Granger-cause the respective net asset values (NAVs, mainly driven by local investors). Moreover, this one-way Granger causality effect from share prices to NAVs becomes much stronger during the crisis period after controlling for U.S. stock returns. Our results suggest that international investors turned pessimistic before local investors.

JEL Classification: G15

Suggested Citation

Pan, Ming-Shiun and Chan, Johnny and Wright, David J., Divergent Expectations and the Asian Financial Crisis of 1997. Journal of Financial Research. Available at SSRN: https://ssrn.com/abstract=212448

Ming-Shiun Pan (Contact Author)

Shippensburg University - Department of Finance and Management Information & Analysis ( email )

Shippensburg University
Shippensburg, PA 17257
United States
717-477-1683 (Phone)
717-477-4067 (Fax)

Johnny Chan

Western Kentucky University - Department of Accounting and Finance ( email )

Bowling Green, KY 42101
United States

David J. Wright

Department of Business ( email )

900 Wood Road
P.O. Box 2000
Kenosha, WI 53141-2000
United States

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