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Exchange Rate Volatility and the Asian Financial Crisis: Evidence from South Korea and ASEAN-5

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  • Ahmad Zubaidi Baharumshah

    (Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia)

  • Hooy Chee Wooi

    (Department of Economics, Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor, Malaysia)

Abstract

This paper investigates the degree of volatility and asymmetric behavior of real exchange rates in East Asian. Exponential generalized autoregressive heteroskedasticity (EGARCH) is deployed to estimate the volatility of the exchange rate returns before and after the 1997 Asian financial crisis. We found that the EGARCH (1,1) specification fits the monthly currency series of the Asian currencies well, suggesting that volatility in exchange rates is time varying and asymmetric. The results show that before the crisis, only three currencies displayed evidence of asymmetries in their conditional variance. After the sharp fall in their currencies, all but one showed a significant increase in volatility and asymmetric effect. We conclude that the crisis caused a contagion that spread through the currency markets. The results of this study underline the importance of economic and political stability in the member countries for the stability of the regional economy.

Suggested Citation

  • Ahmad Zubaidi Baharumshah & Hooy Chee Wooi, 2007. "Exchange Rate Volatility and the Asian Financial Crisis: Evidence from South Korea and ASEAN-5," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 10(02), pages 237-264.
    • Handle: RePEc:wsi:rpbfmp:v:10:y:2007:i:02:n:s0219091507001057
    DOI: 10.1142/S0219091507001057
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    References listed on IDEAS

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    1. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
    2. Glick, Reuven & Rose, Andrew K., 1999. "Contagion and trade: Why are currency crises regional?," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 603-617, August.
    3. Byrne, Joseph B & E. Philip Davis, 2003. "Panel Estimation of the Impact of Uncertainty on Investment in the Industrial Countries," Royal Economic Society Annual Conference 2003 34, Royal Economic Society.
    4. Abbigail J. Chiodo & Michael T. Owyang, 2002. "A case study of a currency crisis: the Russian default of 1998," Review, Federal Reserve Bank of St. Louis, vol. 84(Nov), pages 7-18.
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    Cited by:

    1. Liu, De-Chih & Chang, Yu-Chien, 2022. "Systematic variations in exchange rate returns," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 569-583.

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    More about this item

    Keywords

    EGARCH; asymmetric; exchange rates; spillover effect; JEL Classification: G12; JEL Classification: F31;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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