The impact of the Asian financial crisis on foreign exchange market efficiency

The case of East Asian countries

Bang Nam Jeon, Byeongseon Seo

Research output: Contribution to journalArticle

30 Citations (Scopus)

Abstract

This paper investigates whether the Asian financial crisis in the second half of 1997 affected the foreign exchange market efficiency in four Asian countries hit hard by the crisis: Thailand, Indonesia, Malaysia and Korea. We find that empirical evidence based on the bivariate and multivariate cointegration estimations using the high-frequency data from January 1996 to February 2001 is mostly consistent with the across-country efficient market hypothesis in the Asian foreign exchange markets during the whole sample period except the short period immediately after the July 1997 crisis. Within-country market efficiency also appears to have become weaker immediately after the crisis than before the crisis, but market efficiency was recovered quickly, evidenced by the regained cointegrating relationship for the pairs of the spot-forward exchange rates in the Asian countries. The findings of the threshold effects in the forward market equation and asymmetrical responses of the spot rate to the forward spread imply that there has been a strong force of recovering new equilibrium exchange rate levels in the Asian foreign exchange markets once the rates have been disturbed, especially when their currencies are significantly undervalued compared to the rationally expected level of exchange rates.

Original languageEnglish
Pages (from-to)509-525
Number of pages17
JournalPacific Basin Finance Journal
Volume11
Issue number4
DOIs
Publication statusPublished - 2003 Aug 1
Externally publishedYes

Fingerprint

Market efficiency
Foreign exchange market
Asian countries
Asian financial crisis
Asia
Exchange rates
High-frequency data
Multivariate cointegration
Threshold effects
Korea
Evidence-based
Efficient market hypothesis
Empirical evidence
Equilibrium exchange rate
Thailand
Forward markets
Malaysia
Currency
Forward exchange rates
Indonesia

Keywords

  • Asian financial crisis
  • East Asia
  • Foreign exchange market efficiency

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

The impact of the Asian financial crisis on foreign exchange market efficiency : The case of East Asian countries. / Jeon, Bang Nam; Seo, Byeongseon.

In: Pacific Basin Finance Journal, Vol. 11, No. 4, 01.08.2003, p. 509-525.

Research output: Contribution to journalArticle

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