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The effect of sub-prime crisis on select southeast Asian stock markets

Azahar, Nurshuhaida and Masih, Mansur (2018): The effect of sub-prime crisis on select southeast Asian stock markets.

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The financial sub-prime crisis of USA in 2007-2008 was a contagion as it (within a short period of time) affected Europe within a short period of time. In Asia, particularly the East Asian countries were also affected financially. This is inevitable owing to the fact that these countries are financially connected to the USA. These Asian countries are vulnerable to credit, asset and investment bubble in the USA. As such, property and financial sectors as well as stock markets were greatly affected by the US crisis. This paper attempts to find out the effect of subprime crisis on 4 Southeast Asian countries’ stock markets. Based on our Variance Decompositions (VDC) results, STI (Singapore) is identified as the most exogenous followed by KLCI (Kuala Lumpur). This is consistent with the findings that Singapore appeared to be a regional leader (Yang, Kolari and Min, 2002). JCI (Jakarta) is found to be endogenous and SET (Thailand) is the most endogenous. The small difference in the relative exogeneity between KLCI and STI implies that these two markets are highly integrated and that these markets tend to affect each other. Finally, for the investors, practitioners and decision makers, STI is the most leading index in the region and should subprime crisis affect STI, the effects are highly contagious.

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