An Examination of the Asian Crisis Part I: Regime Shifts in Currency and Equity Markets

We analyze a reduced-form structural relation between currency and equity markets in Indonesia, Malaysia, the Philippines, South Korea, Taiwan and Thailand during the recent Asian crisis using a new non-parametric technique for the identification of regime shifts. We examine both returns and return volatility time series and show how information shocks in these markets moved from country to country in the 1992-1998 time period. We find that volatility breaks occurred before return breaks: shifts in the volatility structure took place in the fall of 1997 for most of the countries in our sample, while the majority of the shifts in returns are concentrated in the first half of 1998. The sequential nature of the observed regime shifts is consistent with the notion that information spillover effects induced return and volatility shocks across Asian markets. In addition, we find that, after the estimated regime breaks occurred, all the Asian equity markets in our study became more responsive to the volatility of the corresponding domestic exchange rate. A companion paper analyzes the relation between these breaks and portfolio rebalancing activity by foreign investors. JEL classification: C51; G15