Short-Term Event-Driven Analysis of the South-East Asia Financial Crisis: A Stock Market Approach

Gerardo Alfonso Perez

doi:10.3390/economies9040150

Abstract

A systematic short-term event review of the major events in the South-East Asia Financial crisis is presented in this article. This analysis adds to the existing literature by focusing on the equity market, rather than on the foreign exchange market where there is already abundant literature, as well as going to a granular level with the hope that the analysis of the short-term market reactions can help policy-maker make appropriate decisions understanding the likely implications on the stock market. Short-term movements in the equity market might have very substantial economic impacts on investors and on the broad economy. The existing literature tends to focus on longer time horizons but from an equity investor point of view short-term fluctuations might be equally important or even more. When analyzing longer time horizons these short-term fluctuations, which might cause investors to fully unwind their positions or even bankruptcies, might be average out, underestimating the potential impact on the investor. Given these practical considerations it seems important to carry out a short-term event driven analysis of this crisis.

Highlights

The South-East Asia financial crisis of the late twentieth century was an unexpected (Krugman 1999) development that saw a rapid deterioration of the economies (Suryahadi et al 2012) and financial markets (Choudhry et al 2007; Click and Plummer 2005; Khan et al 2009) of several South-East Asian countries
Even if the equity market fully recovers after a financial crisis, the loss to equity investors might be very substantial
Equity investors might be forced to unwind the positions because risk management concerns or margin calls, even if they believe that the market is going to recover

Summary

Introduction

The South-East Asia financial crisis of the late twentieth century was an unexpected (Krugman 1999) development that saw a rapid deterioration of the economies (Suryahadi et al 2012) and financial markets (Choudhry et al 2007; Click and Plummer 2005; Khan et al 2009) of several South-East Asian countries. Singapore and Hong Kong were involved in the financial crisis but they were significantly less impacted (Jin 2000), arguably due to a combination of stronger (pre-crisis) financial oversight and regulations as well as relatively high foreign exchange reserves. To put it into context, the Singaporean economy contracted in 1998 only 2.2%. Indonesia for instance had a GDP contraction in 1998 of 13.1% Authors such as Tee (2003) mentioned that the credibility of the Singaporean dollar exchange rate and the sound economic situation of Singapore before the South-East Asia financial crisis were among the major factors protecting the currency during this period; Singapore was clearly impacted. Bennett (1994) compares the case of Hong Kong with a hard peg and Singapore with adjustable peg

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Conclusion