Hostname: page-component-cd9895bd7-dk4vv Total loading time: 0 Render date: 2024-12-27T15:57:01.975Z Has data issue: false hasContentIssue false
  • English
  • Français

Changing Risk, Return, and Leverage: The 1997 Asian Financial Crisis

Published online by Cambridge University Press:  06 April 2009

Neal Maroney ,
Atsuyuki Naka  and
Theresia Wansi
Neal Maroney
Affiliation:
nmaroney@uno.edu, Department of Economics and Finance, University of New Orleans, New Orleans, LA 70148;
Atsuyuki Naka
Affiliation:
anaka@uno.edu, Department of Economics and Finance, University of New Orleans, New Orleans, LA 70148;
Theresia Wansi
Affiliation:
twansi@jcsu.edu, Department of Finance and Economics, Johnson C. Smith University, Charlotte, NC 28216.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper explores risk and return relations in six Asian equity markets affected by the 1997 Asian financial crisis. After the start of the crisis, national equity betas increased and average returns fell substantially. Beta increases due to leverage linked to exchange rates. The increase in expected return needed to accompany this rise in beta is made possible through the creation of capital losses that lower average returns. We propose a new probability-based asset pricing model that captures leverage effects using valuation ratios. Results show the role of leverage in explaining the likelihood of the financial crises. Crosssectional evidence supports time-series findings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 1 , March 2004 , pp. 143 - 166
Copyright
Copyright © School of Business Administration, University of Washington 2004

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aggarwal, R.; Inclan, C.; and Leal, R. “Volatility in Emerging Stock Markets.” Journal of Financial and Quantitative Analysis, 34 (1999), 33–55.CrossRefGoogle Scholar
Andrews, D.W. “Tests for Parameter Instability and Structural Change with Unknown Change Point.” Econometrica, 61 (1993), 821–856.CrossRefGoogle Scholar
Bai, J. “Estimation of a Change Point in Multiple Regression Models.” Review of Economics and Statistics, 55 (1997), 551–563.CrossRefGoogle Scholar
Baig, T., and Goldfajn, I. “Financial Market Contagion in the Asian Crisis.” IMF Working Paper (1998).Google Scholar
Bekaert, G., and Harvey, C. “Time-Varying World Market Integration.” Journal of Finance, 50 (1995), 403–444.Google Scholar
Bekaert, G., and Harvey, C. “Emerging Equity Market Volatility.” Journal of Financial Economics, 43 (1997), 23–77.CrossRefGoogle Scholar
Bekaert, G.; Harvey, C.; and Ng, A.. “Market Integration and Contagion.” Journal of Business, (forthcoming 2004).Google Scholar
Berk, J. “A Critique of Size Related Anomalies.” Review of Financial Studies, 8 (1995), 275–286.Google Scholar
Bertschek, I., and Lechner, M. “Convenient Estimators for the Panel Probit Model.” Journal of Econometrics, 87, (1998), 329–337.CrossRefGoogle Scholar
Bris, A., and Koskinen, Y. “Corporate Leverage and Currency Crises.” Journal of Financial Economics, 21 (2002), 275–310.CrossRefGoogle Scholar
Cochrane, J.Asset Pricing Princeton, NJ: Princeton Univ. Press (2001).Google Scholar
Corsetti, G.; Pesenti, P.; and Roubini, N. “Paper Tigers? A Model of the Asian Crisis.” Working Paper, New York Univ. (1998).CrossRefGoogle Scholar
De Santis, G., and Imrohoroglu, S “Stock Returns and Volatility in Emerging Financial Market.” Journal of Financial Economics, 16 (1997), 561–579.Google Scholar
Dumas, B., and Solnik, B. “The World Price of Exchange Rate Risk.” Journal of Finance, 50 (1995), 445–480.CrossRefGoogle Scholar
Efron, B. “Bootstrap Methods: Another Look at the Jackknife.” Annuls of Statistics, 7 (1979), 1–26.Google Scholar
Fair, R. “Bootstrapping Macroeconometric Models.” Cowles Foundation Working Paper, Yale Univ. (2002).Google Scholar
Fama, E., and French, K. “Common Risk Factors in the Returns on Stock and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E., and French, K. “Value versus Growth: International Evidence.” Journal of Finance, 53 (1998), 1975–1999.CrossRefGoogle Scholar
Ferguson, M., and Shockley, R. “Equilibrium ‘Anomalies.’” Journal of Finance, 58 (2003), 2548–2580.CrossRefGoogle Scholar
Ferson, W., and Harvey, C. “Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing.” Journal of Banking & Finance, 21 (1998), 1625–1665.CrossRefGoogle Scholar
Gande, A.; John, K.; and Senbet, L. S.. “The Role of Incentives in the Prevention of Financial Crises in Emerging Economies.” Working Paper, Univ. of Maryland (2002).Google Scholar
Garbade, K. “Two Methods for Examining the Stability of Regression Coefficients.” Journal of the American Statistical Association, 72 (1977), 54–63.CrossRefGoogle Scholar
Garcia, R., and Ghysels, E. “Structural Change and Asset Pricing in Emerging Markets.” Journal of International Money and Finance, 17 (1998), 455–473.CrossRefGoogle Scholar
Ghysels, E. “On Stable Factor Structures in the Pricing of Risk: Do Time-Varying Betas Help or Hurt? Journal of Finance, 53 (1998), 549–573.CrossRefGoogle Scholar
Hansen, L. P. “Large Sample Properties of Generalized Method of Moments Estimators.” Econometrica, 50 (1982), 1029–1054.CrossRefGoogle Scholar
Harvey, C. “Predictable Risk and Returns in Emerging Markets.”Review of Financial Studies, 8 (1995), 773–816.CrossRefGoogle Scholar
Harvey, C., and Roper, A. “The Asian Bet.” Working Paper, Duke Univ. (1999).CrossRefGoogle Scholar
Hayashi, F.Econometrics Princeton, NJ: Princeton Univ. Press (2000).Google Scholar
Henry, P. B. “Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices.” Journal of Finance, 55 (2000), 529–564.CrossRefGoogle Scholar
Kaminsky, G., and Schmukler, S. “What Triggers Market Jitters? A Chronicle of the Asian Crisis.” Journal of International Money and Finance, 18 (1999), 537–560.CrossRefGoogle Scholar
Krugman, P. “Balance Sheets, the Transfer Problem, and Financial Crises.” Working Paper, MIT (1999).CrossRefGoogle Scholar
Lewellen, J. “The Time-Series Relations among Expected Return, Risk, and Book-to-Market.”Journal of Financial Economics, 54 (1999), 5–43.Google Scholar
Maddala, G.Limited-Dependent Variables and Qualitative Variables in Econometrics. Cambridge, MA: Cambridge Univ. Press (1983).CrossRefGoogle Scholar
Mishkin, F. “Lesson from the Asian Crisis.” Journal of International Money and Finance, 18, (1999), 709–723.CrossRefGoogle Scholar
Nelson, C. R., and Kim, M. “Predictable Stock Returns: The Role of Small Sample Bias.” Journal of Finance, 48 (1993), 641–661.CrossRefGoogle Scholar
Newey, W., and West, K. “A Simple Positive Semi-Definite, Heteroskedasticity Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Pontiff, J., and Schall, L. “Book-to-Market Ratios as Predictors of Market Returns Source.” Journal of Financial Economics, 49 (1998), 141–160.CrossRefGoogle Scholar