Abstract
The emergence of the Asian financial crisis in July 1997 had a tremendous impact on the economies of the Asian countries. This study aims at linking the contagion theory and the crisis faced in Malaysia with more emphasis on the effect of the contagion volatility in the currency exchange market. This research uses the co-relation analysis, models of ARCH, GARCH and also GJR-GARCH in demonstrating the link. The results show that the crisis in Malaysia was not merely due to the weakness in its economic fundamentals, but also due to the contagion and volatility effects particularly originated from Thailand and Singapore. This study suggests the need for a more systematic management system with improved transparency in the financial sector even though the effect of the crisis contagion could hardly be prevented.
Highlights
Asian Financial Crisis: An Analysis of the Contagion and Volatility Effects in the Case of Malaysia
How such a crisis which started in Thailand could occur and spread to other countries in such a short period? In merely a few weeks, most economies of the Asian and South East Asian countries fell and a rather obvious destruction was experienced
The analysis starts with an estimate of the important statistics, the exchange rate (ER) of a number of six countries including Malaysia to identify the status of the market positioning for each country
Summary
Malaysian Ringgit was devaluated as a result of the emergence of the financial crisis in the mid-1997. The devaluation of Baht on 2nd July 1997 became the start of the financial crisis that spread over to other East Asian countries South Korea, Indonesia, Philippines, Malaysia and Japan. According to Peng Yie (2000), the outbreak of the East Asian financial crisis could probably be avoided if Thailand floated its exchange rate six months before the crisis occurred This is because, if Thailand had practiced an organized floating exchange rate regime, and did not exhaust all its reserves amounting USD32 billion to protect the value of Baht, Thailand could have stopped this contagion to other East Asian countries, even though it might not able to stop the economic bubble to burst. The empirical analysis and results are discussed in part 5 and part 6 concludes
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