East Asia and Europe During the 1997 Asian Collapse: A Clinical Study of a Financial Crisis

42 Pages Posted: 10 Dec 2001

See all articles by Rajesh Chakrabarti

Rajesh Chakrabarti

OP Jindal Global University

Richard Roll

California Institute of Technology

Abstract

Asian stock markets are compared with European markets before and during the 1997 Asian crisis. The clinical issue is whether regional inter-dependence became larger around the crisis, fomenting investor fears of contagion and reducing asset values because of lower diversification potential. Statistical measures are developed to aid in this inquiry. We find that European and East Asian countries were not susceptible to volatility contagion in the pre-crisis era but that susceptibility increased significantly in Asia with the onset of the crisis. Covariances, correlations, and volatilities increased from the pre-crisis to the crisis period in both regions, but the percentage increases were much larger in Asia. Diversification potential was better in Asia than in Europe before the crisis; this was reversed during the crisis. The observed decline in diversification potency in Asia is reason enough for large declines in asset values though one cannot prove, of course, that it was the cause rather than the effect of the crisis.

Suggested Citation

Chakrabarti, Rajesh and Roll, Richard W., East Asia and Europe During the 1997 Asian Collapse: A Clinical Study of a Financial Crisis. AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=293566 or http://dx.doi.org/10.2139/ssrn.293566

Rajesh Chakrabarti (Contact Author)

OP Jindal Global University ( email )

Sonepat Narela road
Sonepat
Sonepat, Haryana 131001
India

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

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