The New Asia: Regime Shifts in Currency and Equity Markets
56 Pages Posted: 7 Dec 2000
Date Written: November 2, 2000
This paper analyzes the structural relationship between currency and equity markets in ten Far Eastern countries during the recent Asian crisis. This analysis is done separately for returns and for volatilities. Using a new statistical technology for identifying regime shifts, we are able to demonstrate how information shocks in these markets moved from country to country in the 1992-1998 time period. We also create confidence intervals for when the most significant regime shifts occurred in each country. We find that volatility breaks occur prior to return breaks; more specifically, shifts in the volatility structure occurred in fall 1997 for most countries in our sample, while most shifts in the return structure occurred in mid 1998. The sequential nature of the observed regime shifts is consistent with the notion that return and volatility linkages among Asian markets were created by information spillover effects. Our study also shows that the negative relationship between volatility and returns found by French, Schwert and Stambaugh (1987) for the U.S. market holds for Asian markets. Furthermore, our results indicate that the information shocks in this crisis are related more to equity market movements, in particular, capital flight, than to foreign exchange shocks. An analysis of flow of funds data provides further evidence that information spillover or herding effects generate the observed return and volatility relationships among these countries.
Keywords: Regime shifts, asian crisis, information spillover, exchange rates
JEL Classification: C51, G15
Suggested Citation: Suggested Citation