Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 13, No. 4, pp.407-419
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2000
Received 07 Sep 2000 Revised 02 Apr 2001

Currency Market Reactions to Good and Bad News During the Asian Crisis

Gab-Je Jo ; Thomas D. Willett
Research Fellow, Kookmin Bank Economic & Business Research Center, 8-1, 2-ga, Namdaemun-ro, Jung-gu 100-703, Seoul, Korea, Tel: +82-2-317-2677 gabjejo@yahoo.co.kr
Director, Claremont Institute for Economic Policy Studies and Horton Professor of Economics, Claremont Graduate University and Claremont McKenna College, Tel: +1-909-621-8787 thomas.willett@cgu.edu

JEL Classification: F30, F31, F40

Abstract

There is considerable disagreement among analysts about the extent to which the spread of the Asian crisis was based on reasonable changes in expectations about fundamentals versus pure contagion effects resulting from imperfections in the behavior of currency and financial markets. In this paper we focus specifically on the behavior of the foreign exchange market for five Asian countries. We find little support for the hypothesis that the Asian currency crisis was dominated by panic in the markets such that investors and speculators reacted much more strongly to bad than to good news. While the strongest reactions were to home news, there were also a number of significant cross effects. Almost all of these were of the same sign, suggesting that investors typically assumed that what was good for one country was good for all. Again, there was no systematic evidence of stronger reactions to bad than to good news. The markets may have overreacted in general, pushing currencies below the levels justified by the fundamentals, but, if so, this did not undercut the markets ability to respond to good as well as bad news, nor do these responses appear to have been systematically smaller to good than to bad news. The symptoms of the blind panic that has so often been alleged do not appear in the data.

Keywords:

Currency market reactions, Asian crisis, Contagion effects

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