The Asian crisis: what did local stock markets expect?


In this paper we investigate whether cross-sectional information from local equity markets contained information on devaluation expectations during the Asian crisis. We concentrate on the information content of equity prices as these markets are in general the largest and most liquid in Asia and, thus, presumably the best carriers of information. Using an event-study approach for the period leading up to each of the devaluations which occurred during the Asian crisis (namely those of Indonesia, Korea, Malaysia, the Philippines and Thailand), we compare returns in the equity prices of exporting and non-exporting firms Our hypothesis is that the expectation of a devaluation should help the stock of exporting firms outperform those of non-exporting firms, other things given. We find evidence supporting this hypothesis, although at different degrees depending on the country. In fact, the surprise to equity markets seems to have been larger in Thailand. In the same vein, we find that equity markets did react to devaluations in other countries. This indicates that local market participants attached a non-negligible probability to the possibility that Thailand's currency crisis would spread to other countries in the region.