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Stock prices as a leading indicator of the East Asian financial crisis

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  • Broome, Simon
  • Morley, Bruce

Abstract

Using a basic currency crisis model, we assess the effectiveness of stock prices as a leading indicator of the East Asian currency crisis in 1997 and 1998. Stock prices are incorporated into a basic monetary model, through the wealth effect postulated by Friedman (1988). In addition to the domestic stock price, we also incorporate the stock prices of Hong Kong, China and Japan to determine their ability to predict the crisis. Using monthly data, the results indicate that the domestic stock price is a significant leading indicator, however the main stock prices indicator of the crisis is the Hong Kong stock price. In addition the US price level is also a highly significant predictor of the crisis. Causality tests suggest evidence of bi-causality between the stock markets and foreign exchange markets.
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  • Broome, Simon & Morley, Bruce, 2004. "Stock prices as a leading indicator of the East Asian financial crisis," Journal of Asian Economics, Elsevier, vol. 15(1), pages 189-197, February.
    • Handle: RePEc:eee:asieco:v:15:y:2004:i:1:p:189-197
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    2. Alexis Cruz-Rodríguez, 2014. "Is there a relationship between fiscal sustainability and currency crises? International evidence based on causality tests," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Democritus University of Thrace (DUTH), Kavala Campus, Greece, vol. 7(1), pages 69-87, April.
    3. Muhammad Ali Nasir & Milton Yago & Alaa M. Soliman & Junjie Wu, 2016. "Financial stability, wealth effects and optimal macroeconomic policy combination in the United Kingdom: A new-Keynesian dynamic stochastic general equilibrium framework," Cogent Economics & Finance, Taylor & Francis Journals, vol. 4(1), pages 1136098-113, December.
    4. Cruz-Rodríguez Alexis, 2013. "The Relationship between Fiscal Sustainability and Currency Crises in Some Selected Countries," Review of Economic Perspectives, Sciendo, vol. 13(4), pages 176-194, December.
    5. Muhammad Ali Nasir & Junjie Wu & Milton Yago & Alaa M. Soliman, 2016. "Macroeconomic policy interaction: State dependency and implications for financial stability in UK: A systemic review," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1154283-115, December.
    6. Alexis Cruz Rodriguez, 2011. "Prediction of Currency Crises Using a Fiscal Sustainability Indicator," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 26(2), pages 39-60, December.
    7. Muhammad Ali Nasir & Alaa M. Soliman & Milton Yago & Junjie Wu, 2016. "Macroeconomic Policies Interaction & the Symmetry of Financial Markets’ Responses," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 5(1), pages 53-69.
    8. Muhammad Ali Nasir & Alaa M. Soliman & Muhammad Shahbaz, 2021. "Operational aspect of the policy coordination for financial stability: role of Jeffreys–Lindley’s paradox in operations research," Annals of Operations Research, Springer, vol. 306(1), pages 57-81, November.
    9. Stefan Eichler & Dominik Maltritz, 2011. "Stock Market‐Induced Currency Crises—A New Type of Twins," Review of Development Economics, Wiley Blackwell, vol. 15(2), pages 223-236, May.
    10. Tsai, I-Chun, 2015. "Dynamic information transfer in the United States housing and stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 215-230.
    11. Eirini Syngelaki, 2010. "Linkages between Excess Currency and Stock Market Returns:Granger Causality in Mean and Variance," Economics Department Working Paper Series n209-10.pdf, Department of Economics, National University of Ireland - Maynooth.
    12. Cruz-Rodríguez, Alexis, 2015. "Sostenibilidad fiscal y crisis cambiarias: Un análisis empírico [Fiscal sustainability and currency crises: An empirical analysis]," MPRA Paper 67741, University Library of Munich, Germany.
    13. Cruz-Rodriguez, Alexis, 2014. "¿Puede un índice de sostenibilidad fiscal predecir la ocurrencia de crisis cambiarias? Evidencias para algunos países seleccionados [Can a fiscal sustainability indicator predict the occurrence of ," MPRA Paper 54103, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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