A Nonlinear New Approach to Investigating Crisis: A Case from Malaysia

Omay, Tolga (2010): A Nonlinear New Approach to Investigating Crisis: A Case from Malaysia.

Abstract

In this paper, we have investigated the effects of Asia 97 crisis on Malaysian stock exchange market by using a nonlinear approach which gives a detailed analysis with respect to linear counterparts. Specifically, we are using generalized impulse response function (GIRF) in order to see the effects of crisis on stock indices. In order to employ GIRF analysis, we need further investigation on potential nonlinearities in conditional mean and variance equation for Malaysia stock market. Specifically, we use STAR-STGARCH family models for modeling daily returns of the Investable and Non-Investable Malaysia stock indices, covering the period 1995.06.30-2003.09.05. The analysis of this paper shows that individual markets of Malaysia have strongly been affected from the Asia 97 crisis. In addition, the Asia 97 crisis has increased the variability of the Malaysia stock market and affected foreign investors more than the domestic investors.

• Item Type: MPRA Paper
• Language: English
• Keywords: STAR-STGARCH, Generalized Impulse Response Function. 1997 Asia Crisis, stock markets
• Subjects: G - Financial Economics > G1 - General Financial Markets; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes

References

Abutaleb, A.S. and Papaioannou, M. G. (2000) “Maximum Likelihood Estimation of a time-varying parameters: an application to the Athens Stock Exchange Index”, Applied Economics, 32, pp. 1323-1328

Barkoulas, J.T. and N. Travlos (1998) “Chaos in an emerging capital market? The case of Athens stock exchange ”, Applied Financial Economics, 8 pp. 231-243

Bekaert, G. and Harvey, C. (1997), “Emerging equity market volatility”, Journal of Financial Economics, 43, pp. 29-77

Bollerslev, T. (1986) “Generalized Autoregressive Conditional Heteroskedasticity”, Journal of Econometrics, 31, pp. 307-327

Brock, W.A. and LeBaron, B.D. (1996) “A dynamic structural model for stock return volatility and trading volume”, The Review of Economics and Statistics, vol. 78, issues 1, pp. 94-110

Brock, W.A. and Hommes, C. H. (1998) “Heterogeneous beliefs and routes to chaos in a simple asset pricing model”, Journal of Economic Dynamics and Control, vol. 22, issues 8-9, pp. 1235-1274

Busetti, Giorgio and Manera, Matteo (2003) “STAR-GARCH Models for Stock Market Interactions in the Pacific Basin Region, Japan and US”, FEEM Working Paper no: 43.2003

Bustelo, P. (1998) “The East Asian Financial Crises: An analytical survey”, ICEI working paper , No: 10.

Campbell, J. Y., Lo, A. W. and MacKinlay, C. (1997) The Econometrics of Financial Markets , Princeton University Press, Princeton.

Chan, K. and Tong, H. (1986). “On estimating thresholds in autoregressive models”, Journal of Time Series Analysis, Vol. 7, pp. 179–194

Chan, F. and McAleer, M. (2002) “Maximum likelihood estimation of STAR and STAR-GARCH models: theory and Monte Carlo evidence”, Journal of Applied Econometrics, vol. 17, issue 5, pp. 509-534

Chan, F. and McAleer, M. (2003) “Estimating smooth transition autoregressive models with GARCH errors in the presence of extreme observations and outliers”, Applied Financial Economics, vol. 13, issue 8, pp. 581-592

Coakley, J. and Fuertes, A. M. (2001). “A nonlinear analysis of excess foreign exchange returns”, Manchester School, Vol. 69, pp. 623–642.

Corsetti, G., P. Pesenti and N. Roubini (1998), “What Caused the Asian Currency and Financial Crisis?”, New York University, March, processed.

De Santis, G. and Imrohoroğlu, S. (1997) “Stock returns and volatility in emerging financial markets”, Journal of International Money and Finance, 16(4), pp. 561-579

Diebold, X. F., and Mariano, S. R. (1995). “Comparing predictive accuracy.” Journal of Business and Economic Statistics, 13(3), pp. 253–263.

Dumas, B. (1992). “Dynamic equilibrium and the real exchange rate in a spatially separated world”, Review of Financial Studies, Vol. 5, pp. 153–180.

Dumas, B. (1994). “Partial equilibrium versus general equilibrium models of the international capital market”, in Van Der Ploeg, F. (ed.), The Handbook of International Macroeconomics, Blackwell, Oxford, 301–347.

Eitrheim, Ø, Teräsvirta, T. (1996) “Testing the Adequacy of Smooth Transition Autoregressive Models”, Journal of Econometrics, 74, pp. 59-75

Engle, R.F. (1982) “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation”, Econometrica, 50, pp. 987-1007

Hagerud E. G. (1996) “A Smooth Transition ARCH Model for Asset Returns”, SSE, Working Paper Series in Economics and Finance, No 162.

Hansen, B.E. (1996) “Inference when a nuisance parameter is not identified under the null hypothesis”, Econometrica, 64, pp. 413-430,

Harvey, C. R. (1995) “Predictable Risk and returns in emerging markets” Review of Financial Studies, 8, pp. 773-816.

Hasanov, M. and Omay, T.,(2008) “Nonlinearities in Emerging Stock Markets: Evidence from Europe’s Two Largest Emerging Markets” Applied Economics. 40,(23),p.2645-2658.

Hasanov, M. and Omay, T., (2007) “Are the transition stock markets efficient? Evidence from non-linear unit root tests”, Central Bank Review, vol:7(2), 1-7.

He, H. and Modest, D. (1995). “Market frictions and consumption-based asset pricing”, Journal of Political Economy, Vol. 103, pp. 94–117.

Hong, H. and Stein, J. C. (1999). “A unified theory of underreaction, momentum trading, and overreaction in asset markets”, Journal of Finance, Vol. 54, pp. 2143–2184.

Granger, C.W.J. and Teräsvirta, T. (1993) Modelling Nonlinear Economic Relationships. Advanced Texts in Econometrics, Oxford University Press

IMF (1998a), World Economic Outlook. May 1998, IMF, Washington DC, May.

IMF (1998b), World Economic Outlook. October 1998, IMF, Washington DC,October.

Kilic, R. (2004) “On the Long memory properties of emerging capital markets: evidence from Istanbul Stock exchange”, Applied Financial Economics, 14, pp. 915-922

Koop, G., M.H. Pesaran and S.M. Potter, (1996) éImpulse response analysis in nonlinear multivariate models”, Journal of Econometrics, 74, pp 119-147.

Krägler, H. and Krugler, P. (1993). “Nonlinearities in foreign exchange markets: a different perspective”, Journal of International Money and Finance, Vol. 12, pp. 195–208.

Krugman, P. (1997), “Currency Crises”, MIT, October, processed.

Krugman, P. (1998a), “What Happened to Asia?”, MIT, January, processed

Leon, H. and Najarian, S. (2005) “Asymmetric adjustment and nonlinear dynamics in real exchange rates”, International Journal of Finance and Economics, 10, pp. 15–39

Lundbergh, S. and Teräsvirta, T. (1998) “Modelling Economic High-Frequency Time Series with STAR-STGARCH Models”, SSE, Working Paper Series in Economics and Finance, No 291

Lundbergh, S. and Teräsvirta, T. (2002) “Evaluating GARCH models”, Journal of Econometrics, 110, pp. 417-435

Luukkonen, R., Saikkonen P. and Teräsvirta, T. (1988) “Testing Linearity against smooth transition autoregressive models, Biometrika, 75, pp. 491-499

Lux, T. (1995) “Herd Behaviour, Bubbles and Crashes”, Economic Journal, vol. 105, issue 431, pp. 881-896

McMillan, D.G. (2003) “Non-linear Predictability of UK Stock Market Returns”, Oxford Bulletin of Economics and Statistics, vol. 65, issue 5, pp. 557-573

Narayan, P. K. (2005), “Are the Australian and New Zealand stock prices nonlinear with a unit root?”, Applied Economics, vol. 37, issue 18, pp. 2161-2166

Obstfeld, M. and Taylor, M. (1997). “Nonlinear aspects of goods-market arbitrage and adjustment: Heckscher’s commodity points revisited”, Journal of the Japanese and International Economies, Vol. 11, pp. 441–479.

Östermark, R., Aaltonen,J., Saxen, H. and Söderlund, K. (2004) “Nonlinear Modelling of the Finnish Banking and Finance Branch Index”, The European Journal of Finance, 10, pp. 277-289

Patel, S. and Sarkar, A. (1998) “Stock markets in developed and emerging markets”, Research Paper No: 9809, Federal Reserve Bank of New York

Peters, E.E. (1994), Fractal Market Analysis: Applying Chaos Theory to Investment and Economics, John Wiley and Sons, New York

Pötscher, B.M. and Prucha, I.V. (1997) Dynamic Nonlinear Econometric Models – Asymptotic Theory, Berlin, Springer-Verlag

Radelet, S. and J. Sachs (1998), “The Onset of the East Asian Financial Crisis”,HIID, February, processed.

Sarantis, N. (2001), “Nonlinearities, cyclical behaviour and predictability in stock returns: international evidence”, International Journal of Forecasting, pp. 459-482

Rothman, P., D. Van Dijk and P. H. Franses (2001), Multivariate STAR analysis of money-output relationship, Macroeconomic Dynamics, 5, pp. 506-32

Sarno, L. (2000) “Real Exchange Rate Behaviour in High Inflation Countries: Empirical Evidence from Turkey, 1980-1997”, Applied Economics Letters, 2000, vol. 7, issue 5, pages 285-91

Shively, P.A. (2003), “The nonlinear dynamics of stock prices”, The Quarterly Review of Economics and Finance, vol. 43, issue 3, pp. 505-517

Shleifer, A. (2000). Inefficient Markets. An Introduction to Behavioural Finance. Clarendon Lectures in Economics, Oxford University Press, Oxford.

Taylor, M. P. and Sarno, L. (2001) “Real Exchange Rate Dynamics in Transition Economies: A Nonlinear Analysis”, Studies in Nonlinear Dynamics & Econometrics, 5(3), pp. 153-177

Teräsvirta, T. (1994) “Specification, Estimation, and Evaluation of Smooth Transition Autoregressive Models”, Journal of the American Statistical Association, 89, pp. 208-218

Teräsvirta, T., Anderson, H. (1992) “Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models”, Journal of Applied Econometrics 7, S119-36.

Van Dijk, D.J.C. (1999), Smooth Transition Models: Extensions and Outlier Robust Inference, Tinbergen Institute Research Series No. 200

Vougas, D.V. (2004) Analysing long memory and volatility of returns in the Athens stock exchange, Applied Financial Economics, 14, pp. 457-460

White, H. and Domowitz, I. (1984) “Nonlinear regression with dependent observations”, Econometrica, 52, pp. 143-161

Wade, R, and F. Veneroso (1998a), “The Asian Financial Crisis: The Unrecognized Risk of the IMF’s Asia Package”, The Russell Sage Foundation, February, processed.

Wooldridge, J. M. (1991) “On the application of robust, regression-based diagnostics to models of conditional means and conditional variances”, Journal of econometrics, 47 pp 546-567.