High‐Frequency Contagion of Currency Crises in Asia*

Using daily data from the Asian currency crisis, the present paper examines high‐frequency contagion effects among six Asian countries. The ‘origin’ (of exchange rate depreciation, or decline in stock prices) and the ‘affected’ (currencies, or stock prices) in the daily spillover relationship were defined and identified. Indonesia is found to be the main origin country, affecting exchange rates of other countries. Contrary to conventional wisdom, evidence of high‐frequency crisis spillover from the Thai exchange rate to other currencies was weak at best. There exists a high‐frequency contagion in stock markets among East Asian countries. Contagion coefficients are positively correlated with trade indices, indicating that investors lower their financial assessment of a country that has trade linkage to a crisis origin country within days, if not hours, of a shock.     

Estimating time-varying currency betas with contagion: New evidence from developed and emerging financial markets

This paper examines the conditional time-varying currency betas from five developed and six emerging financial markets with contagion and spillover effects. We employ a trivariate asymmetric BEKK-type GARCH-in-Mean (MGARCH-M) approach to estimate the time-varying conditional variance and covariance of returns of stock market index, the world market portfolio and bilateral exchange rate between the US dollar and the local currency. The results show that the world market and currency risks are not only priced in the stock markets, but also time-varying. It is found that currency betas are much more volatile than the world market betas, and currency betas in the emerging markets are more volatile than those in the developed markets. We find empirical evidence of contagion effect and spillovers between stock market and foreign exchange market during the recent global financial crisis, and the effect is stronger in the emerging markets than that in the developed markets. Two applications are provided to illustrate the usefulness of time-varying currency betas.     

The Korean stock market volatility during the currency crisis and the credit crisis

This paper studies the volatility of the Korean stock market during the Asian currency crisis of 1997–1998 and the global credit crisis of 2008–2009. We use a fad model with Markov switching heteroskedasticity, which was first proposed by Kim and Kim (1996). Using the monthly data from January 1980 to October 2009, we find that the volatility of the transitory component of the stock return, or fads, increased during the currency crisis, but did not rise much during the credit crisis. It implies that the stock price fluctuations were not driven by irrational sentiments during the recent global crisis as much as during the former crisis. However, when we consider the dollar value of the Korean stock index in order to estimate the volatility that foreign investors confront, we find that the volatility of the transitory component was raised during the credit crisis as well as during the currency crisis. That is, foreign investors experienced greater volatility than domestic investors in the recent financial market turmoil. This asymmetric volatility that domestic and foreign investors face is one of the characteristics of the credit crisis.For more detailed analysis, the same model was applied to the weekly data from January 2005 to October 2009 and provided the result that the data measured by won–dollar exchange rates were more increased than the raw data. It holds that foreign investors confronted much greater volatility than domestic investors while the stock volatility was relatively lower in the credit crisis state than in the currency crisis state.     

US pressure on China: Silver flows, deflation, and the 1934 Shanghai credit crunch

US pressure for Chinese currency appreciation in the face of a weakening dollar was initially resisted in the post-2003 period. No such option was available in the 1930s, however, when dollar weakness was accompanied by silver purchases that automatically drove up the value of China's old silver-based currency. New empirical evidence suggests a significant link between the policy-induced driving up of US silver prices and Chinese exchange rate appreciation and price deflation. Moreover, the reversal of the silver flow into Shanghai as large-scale US purchases began in 1934 appears to have been met by a credit crunch in that city—as evidenced by bank failures, and real estate and stock market declines. The silver flow from the interior to Shanghai had previously insulated the financial center from the credit shortages faced elsewhere in China after deflation first emerged in 1932–1933.     

Hong Kong's exchange rate regime:: Lessons from Singapore

Singapore's managed floating exchange rate regime contrasts with Hong Kong's currency board system featured by the Hong Kong–United States dollars peg. This paper appraises the two different exchange rate regimes by comparing their track records in maintaining macroeconomic stability and trade competitiveness in the 1990s. A review of the two regimes' institutional characteristics and macroeconomic performance reveals the systemic inadequacy of Hong Kong's exchange rate regime under a changing global financial environment. As East Asia emerges from the recent financial crisis, Singapore's experience of successfully moving away from a currency board system to a credible managed floating regime offers a lesson worthy of attention from Hong Kong.     

The Yen,the US dollar,and the trade weighted basket of currencies: Does the choice of anchor currencies matter in identifying incidences of speculative attacks?

Early constructions of a single crisis index known as the exchange market pressure (EMP) index have largely been based on the fluctuations of the real or nominal exchange rate of a currency against the US dollar—the most commonly accepted anchor currency in the global market. Hardly any studies have however tested the sensitivity of this crisis index to the choice of different “anchor” currencies. To address this pertinent issue, our study considers the EMP indices of the Indonesian rupiah, Malaysian ringgit and Thailand baht constructed by adopting three different exchange rates—the real effective rate, the local currency against the US dollar, and the local currency against the Japanese yen for the period of 1985–2003. The test results indicate that the reported incidences of speculative attacks are highly sensitive to the choice of anchor currencies.     

Real Exchange Rates, Valuation Effects and Growth in Emerging Markets

We compare the relationship between net capital inflows, real exchange rate movements and growth for twenty emerging markets and twelve developed countries over the period 1985–2004. In developed countries low real exchange rates are associated with faster growth, but in emerging markets depreciations depress growth, even outside crisis periods, and are closely correlated with declines or reversals in net capital inflows. To investigate valuation effects of currency movements, we construct debt-weighted real exchange rate indices for emerging markets, which are more closely correlated with growth than trade-weighted indices.     

East Asian equity markets,financial crises,and the Japanese currency

The paper studies the interactions between the US and four East Asian equity markets. The focus is on the change in the information structure/flow between these markets triggered by the 1997 Asian financial crisis. It is shown that the information structure during the crisis period is different from that in the non-crisis periods. While the US market leads the four East Asian markets before, during, and after the crisis, it is Granger-caused by these markets during the financial crisis period but not in the post-crisis sample. Further, in accordance with concerns reported in the market, the Japanese currency is found to affect these equity markets during the crisis period. The Japanese yen effect, however, disappears in the post-crisis sample. The Japanese currency effect is quite robust as it is found from both local currency and US dollar return data and in the presence of Japanese stock returns. J. Japanese Int. Economies 21 (1) (2007) 138–152.     

Exchange rate exposure of sectoral returns and volatilities: Evidence from Japanese industrial sectors

Most studies of exchange rate exposure of stock returns do not address three relevant aspects simultaneously. They are, namely: sensitivity of stock returns to exchange rate changes; sensitivity of volatility of stock returns to volatility of changes in foreign exchange market; and the correlation between volatilities of stock returns and exchange rate changes. In this paper, we employ a bivariate GJR-GARCH model to examine all such aspects of exchange rate exposure of sectoral indexes in Japanese industries. Based on a sample data of fourteen sectors, we find significant evidence of exposed returns and its asymmetric conditional volatility of exchange rate exposure. In addition, returns in many sectors are correlated with those of exchange rate changes. We also find support for the “averaged-out exposure and asymmetries” argument. Our findings have direct implications for practitioners in formulating investment decisions and currency hedging strategies.     

Twin Banking and Currency Crises and Monetary Policy

Currency crises are found to be strongly associated with banking crises. This paper constructs a twin banking and currency crisis model by introducing the banking sector into the currency crisis model and examining the case in which the exchange rate risk is located in the banking system. The model shows that an unanticipated shock caused by the shift of investors’ expectations and/or a negative productivity shock can trigger a twin banking and currency crisis. To achieve both financial stability and economic stability, the central bank uses multiple monetary policy instruments. In contrast to the conventional policy recommendation in response to a currency crisis, i.e., interest rate hike, we find that when the exchange rate risk is located in the banking sector, the monetary policy option to prevent a twin crisis is to lower the policy interest rate and the reserve requirement ratio and raise the interest rate on reserves. Our results show that the location of the exchange rate risk matters for the choice of an appropriate monetary policy response during a crisis.     

Measuring Exchange Market Pressure and Its Contagion in the East African Community

As the members of the East African Community seek to further integrate their economies, issues of compatibility arise. How interlinked are these countries' exchange markets, and which currencies are most likely to influence their neighbours? This study constructs monthly indices of exchange market pressure (EMP) for Burundi, Kenya, Rwanda, Tanzania and Uganda over the past decade. Two methods of constructing these indices are shown to exhibit large differences. Vector autoregressive approaches are then applied to the main EMP series and a set of global stock price proxies. Kenya, the dominant economy, is shown to have the largest effect on the region but is not itself affected by other regional currencies. Foreign stock price declines increase EMP for all countries except Tanzania, which is also the least integrated in terms of trade. This suggests that financial integration in the region is uneven – with implications for a successful common currency.     

Risk Sensitivity of Bank Stocks in Malaysia: Empirical Evidence Across the Asian Financial Crisis

The present study examines the sensitivity of commercial banks' stock excess returns to their volatility and financial risk factors, measured by interest rates and exchange rates, across the recent Asian financial crisis. In general, we found that there were no significant differences among Malaysian commercial banks in their risk exposure prior to and during the Asian financial crisis. The introduction of selective capital controls, a fixed exchange rate regime and a forced banking consolidation program, however, had increased the risk exposure of both large and small domestic banks. The effects of these risk factors were significantly detected in both large and small banks.     

Asian Currency Crisis and the Generalized PPP: Evidence from the Far East

The present paper investigates the effects of the Asian currency crisis of 1997–1998 on the generalized PPP between several real exchange rates of the Far East countries. Monthly log of real exchange rates of the currencies of Thailand, Malaysia, Indonesia, the Philippines and South Korea vis-à-vis the US dollar and the Japanese yen during 1990–2004 are applied in the investigation. Further tests are conducted between exchange rates vis-à-vis the Thai baht. Tests are conducted for periods before and after the crisis. Results from the Johansen method of multivariate cointegration show a substantial change in the relationship between these real exchange rates before and after the Asian currency crisis. This result is found using rates based on three currencies: US dollar, yen and baht.     

Testing for cointegration with threshold effect between stock prices and exchange rates in Japan and Taiwan

This paper empirically investigates the exchange rate effects of the New Taiwan dollar against the Japanese Yen (NTD/JPY) on stock prices in Japan and Taiwan from January 1991 to Mach 2008. Our study employs the newly threshold error-correction model (TECM) elaborated by Enders and Granger [Enders, W., Granger, C.W.F., 1998. Unit-root tests and asymmetric adjustment with an example using the term structure of interest rates. Journal of Business Economics & Statistics 16, 304–311] and Enders and Siklos [Enders, W., Siklos, P.L., 2001. Cointegration and threshold adjustment. Journal of Business Economics & Statistics 19, 166–176], assuming the nature of the relationship between the variables is on the basis of non-linearity. The empirical evidence suggests that there is a long-run equilibrium relationship between NTD/JPY and the stock prices of Japan and Taiwan during the time period investigated. However, an asymmetric threshold cointegration relationship only exists in Taiwan’s financial market. Furthermore, we extend our research by taking into account the effect of the U.S. exchange rate specifically on Taiwan’s financial market. This research also finds a long-term equilibrium and asymmetric causal relationships between NTD/USD and the stock prices of Taiwan. In addition, the results of TECM Granger-Causality tests show that no short-run causal relationship exists between the two financial assets considered for both countries’ cases. However, in the long run a positive causal relationship running from either the Japan or U.S. exchange rate to the stock prices of Taiwan strongly argues for the traditional approach.     

Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence

The present paper studies China's national level currency exposure since 2005 when the country adopted a new exchange rate regime allowing the renminbi (RMB) to move towards greater flexibility. Using generalized autoregressive conditional heteroskedastic and constant conditional correlation‐generalized autoregressive conditional heteroskedastic methods to estimate the augmented capital asset pricing models with orthogonalized stock returns, we find that China equity indexes are significantly exposed to exchange rate movements. In a static setting, there is strong sensitivity of stock returns to movements of China's tradeweighted exchange rate, and to the bilateral exchange rates except the RMB/dollar rate. However, in a dynamic framework, exposure to all the bilateral currency pairs under examination is significant. The results indicate that under the new exchange rate regime, China's gradualist approach to moving towards greater exchange rate flexibility has managed to keep exposure to a moderate level. However, we find evidence that in a dynamic setting, the exposure of the RMB to the dollar and other major currencies is significant. For China, the challenge of managing currency risk exposure is looming greater.     

A tale of Asian exchange rate management: Romance of the three currencies

Asian currencies lack regional policy coordination and are therefore subject to volatilities such as the Asian currency crisis of 1997/99. As the Asian currencies have already been observed to be ‘flying-in-unison’, a stable exchange rate arrangement can be helpful as the next step of evolution for regional financial stability. We consider that creating a cluster effect from coordinated efforts/policies of policy-makers can lead to regional exchange rate stability. To demonstrate this cluster effect, a three-party-game is computed for an Asian bloc, viz-á-viz US dollar and the Euro, based on a Nash and a cooperative equilibrium. The cluster effect would generate external and internal pressures that work towards the formation of a regional currency, although the exact form of exchange rate regime would have to await political consensus. There are substantial welfare gains within Asia network economy through currency cooperation. The formation of an Asian currency bloc would also create counter-balance to the current dominance of the US dollar and the Euro. Like the epic story of Three Kingdoms who sought hegemony in Chinese history, the Asian currency bloc will contend with many possible outcomes of competition as well as cooperation.     

货币错配与经济金融稳定:来自亚太地区的经验

中国的汇率制度改革使得在钉住汇率制度下积聚的巨大货币错配风险逐渐暴露出来。货币错配是否会影响经济金融稳定,通过对亚洲金融危机、日本经济衰退以及本世纪以来亚洲新兴市场国家累积的新风险进行梳理、比较与分析,认为净外币负债型货币错配与净外币资产型货币错配在一定条件下都会影响经济金融稳定。     

Dynamic Relationships between Exchange Rates and Foreign Direct Investment: Empirical Evidence from Korea

This paper examines the short‐run and long‐run dynamic relationships between exchange rates and foreign direct investment (FDI) in Korea. Monthly data retrieved from the Bank of Korea from January 1999 to March 2012 are examined. A cointegration test, a vector error correction model, the Wald test and impulse responses techniques are applied to analyze the data. The present study finds that, first, long‐run causation between exchange rates and FDI flows exists, which implies that a change in exchange rates negatively affects FDI flows in the long run. Second, short‐run causation between exchange rates and FDI flows exists, which confirms that there is reciprocal feedback between the two variables. Finally, the study finds evidence of a structural break from the global financial crisis of 2007–2009 shock to FDI flows in Korea. An external shock affects changes in the endogenous variables and, thus, causes instability in the cointegrating vector in the system.     

The co-movement of stock markets in East Asia: Did the 1997–1998 Asian financial crisis really strengthen stock market integration?

This paper examines the integration and causality of interdependencies among seven major East Asian stock exchanges before, during, and after the 1997–1998 Asian financial crisis. For this purpose, we use daily stock market data from July 1, 1992 to June 30, 2003 in local currency as well as US dollar terms. The data reveal that the relationships among East Asian stock markets are time varying. While stock market interactions are limited before the Asian financial crisis, we find that Hong Kong and Singapore respond significantly to shocks in most other East Asian markets, including Shanghai and Shenzhen, during this crisis. After the crisis, shocks in Hong Kong and Singapore largely affect other East Asian stock markets, except for those in Mainland China. Finally, considering the role of the USA shows that it strongly influences stock returns in East Asia – except for Mainland China – in all periods, while the reverse does not hold true.     

Risk and Asian Exchange Rate Regimes

Abstract

A panel regression gives evidence that more flexibility in Asian exchange rates reduces risk associated with bank borrowing abroad, but deviations from mean exchange rates, and from the renminbi, increase risk. Since the exchange rate regime affects bank behavior and the incentives to hedge, the results broadly support the bank run over the moral hazard view of twin banking and currency crisis. The results suggest that flexibility in exchange rates is required for Asian EMEs, but the flexibility has to be limited, and it depends on more flexibility in the renminbi. This has implications for current global imbalances in reserves and feasible adjustment paths.