Stock Prices Of Domestic Banking Sector And External Shocks In East Asia

This paper examines the impact of price fluctuations in foreign stock markets on the stock prices of domestic banks’ stocks to explore if and how external shocks have affected the banking system in Korea, Malaysia, Singapore, and Thailand during the 2000s. Some researchers insist that domestic banks in East Asia were less affected by the 2007–2009 global financial crisis. However, few previous articles have investigated how the banking sector in East Asia has been affected by external shocks. Employing a multinomial logit model, this study estimates how changes in the US and Japanese stock market indices affected the banking sectors in Korea, Malaysia, Singapore, and Thailand before the 1997 crisis and before and during the 2007–2009 crises. This study’s regression employs the number of banks in a given country that experienced a large shock on the same day (“coexceedances”) as shocks to the domestic banking sector. The regression result suggests that fluctuations in foreign stock market indices had a larger impact on prices of East Asian banking stocks during the 2000s than during the 1990s before the Asian financial crisis. Although the shock brought by the deteriorating foreign stock markets was significant before the 2007–2009 global financial crisis, both increases and declines in the foreign stock prices affected the banking sector during the crisis. Increasing foreign capital flows and foreign assets and liabilities may have greatly influenced the domestic banking system of East Asia in the 2000s.