The Asian financial crisis: market inefficiency and speculative bubbles

Abstract

A significant body of economic literature considers the collapse of Thailand's financial market as one of the causes of the Asian financial crisis during the years 1997-1998. The phenomenon subsequently raises the question of whether the stock market of Thailand at the time was working efficiently or characterised substantially by speculative bubbles. Empirical tests are, however, rare. The present study revisits the 1997 Asian financial crisis and empirically investigates the presence of market inefficiency and speculative bubbles in the Thai stock market using monthly data spanning January 1985 to December 1998. A variety of contemporary econometric tests provide substantial evidence for the existence of market inefficiency, speculative bubbles and overvalued stocks in the Thai stock market during the Asian remarkable economic growth in the late 1980s and early 1990s. The findings also contribute to the scholarly research on this topic by offering additional insights into the anatomy and dynamic behaviour of Thai stock prices during the crisis episode.