The US Subprime Crises and Extreme Market Pressures in Asia

Siregar, Reza and Pontines, Victor and Mohd Hussain, Nurulhuda (2010): The US Subprime Crises and Extreme Market Pressures in Asia.

Abstract

The primary objective of this study is to examine the evidence of occurrences of extreme market pressure of currencies of a number of Asian economies against the US dollar during the period of 2000-2009. In particular, we are interested in investigating the severity of these pressures during the recent US sub-prime crisis of 2007-2009. Were the currencies of these economies subjected to indiscriminate selling pressures during the period of the crisis? Was the heightened severity of the selling pressures associated with a particular event during the subprime crisis, such as the collapse of the Lehman Brothers? Our findings confirm the globally indiscriminate impacts of the sub-prime crisis on the countries examined and the greatest impact was felt and experienced by these economies around the time of the Lehman-Brothers’ collapse during the last quarter of 2008. Our findings offer far-reaching implications in terms of the linkages between macroeconomic and financial stability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Currency Crisis; Exchange Market Pressure; SEACEN; Extreme Value Theory
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

ADB, (2005), Early Warning Systems for Financial Crises: Application to East Asia, Palgrave MacMillan, New York, NY, USA.

Aizenman, J., Hutchison, M. and Noy, I. (2008), “Inflation Targeting and Real Exchange Rates in Emerging Markets”, NBER Working Paper, no.14561.

Beyoumi, T. and Melander, O., (2008), “Credit Matters: Empirical Evidence of US Macro-Financial Linkages”, IMF Working Paper, WP/08/169.

Diebold, F., Schuermann, T. and J. Stroughair, (2000), Pitfalls and Opportunities in the Use of Extreme Value Theory in Risk Management, in P. Embrechts (ed.), Extremes and Integrated Risk Management, Risk Books, U.K.

Eichengreen, B., Rose, A., Wyplosz, C., (1995), “Exchange Market Mayhem: the Antecedents and Aftermaths of Speculative Attacks”, Economic Policy, 21, 249–312.

Eichengreen, B., Rose, A.,Wyplosz, C., (1996), “Contagious Currency Crises: First Tests”, Scandinavian Journal of Economics, 98, 463–484.

ESCAP, (2009), Economic and Social Survey of Asia and the Pacific 2009,http://www.unescap.org/pdd/publications/survey2009/stimulus/fiscal-stimulus.pdf

Hill, B.M., (1975), “A Simple General Approach to Inference about the Tail of a Distribution,” Annals of Statistics 3, pp. 1163-1174.

Huisman, R., Koedijk, K.G., Kool, C.J.M., and F. Palm, (2001), “Tail-Index Estimates in Small Samples,” Journal of Business and Economic Statistics 19, pp. 208-216.

Kaminsky, G., Lizondo, S. and Reinhart, C., (1998), “Leading Indicators of Currency Crisis”, IMF Staff Papers 45/1, International Monetary Fund, Washington, DC.

Kaminsky, G. and Reinhart, C., (1999), “The Twin Crises: The Causes of Banking and Balance of Payments Problems, American Economic Review 89(3), pp. 537-560.

Kodres, L. and Narain, A., (2009), “What is to be Done?” Finance and Development, IMF, No.1,Vol. 46, March.

Lane, Timothy, (1999), “The Asian Financial Crisis –What We Have Learned”, Finance and Development, Vol.36, No.3. 16

Lestano and J.P.A.M. Jacobs, (2007). “Dating Currency Crises with Ad-Hoc and Extreme Valuebased Thresholds: East Asia 1970-2002 [Dating Currency Crises],” International Journal of Finance and Economics 12, pp. 371-388.

Pontines, V., (2010), “Fat-tails and House Prices in OECD countries”, Applied Economics Letters, forthcoming.

Pozo, S., and Dorantes, C.A., (2003), “Statistical Distributions and the Identification of Currency Crises”, Journal of International Money and Finance, 22, 591–609.

Rahmatsyah, T., Rajaguru, R. and Siregar, R., (2002), “Exchange Rate Volatility, Trade & “Fixing for Life” in Thailand”, Japan and the World Economy, Vol. 14, No. 4, December, pp. 445-470.

Ronci, M., (2005), “Trade Finance and Trade Flows: Panel Data Evidence from 10 Crises”, in ed. Wang, J-Y and Mario Ronci, Access to Trade Finance in Times of Crisis, InternationalMonetary Fund.

Reinhart, C.M, and Rogoff, K.S., (2008), “A Panoramic View of Eight Centuries of Financial Crises”, NBER Working Paper No.13882, (March).

Siregar, R. And Rajan, R., (2004), “Impacts of Exchange Rate Volatility on Indonesia’s Trade Performance in the 1990s”, Journal of the Japanese and International Economies, Vol. 18, Issue 2, pp. 218-240.

Siregar, R. and James, W.E., (2006), “Designing Financial Safety Net Structures in Indonesia: Selected Lessons and Challenges”, ASEAN Economic Bulletin, Vol. 23, No.1, April, pp. 98-113.

Siregar, R. and Siwei, G., (2010), “Effectiveness and Commitment to Inflation Targeting Policy: Evidence from Indonesia and Thailand”, Journal of Asian Economics, Vol.21, pp.113-128.

Siregar, R. and Lim, C.S., (2010), “The Role of Central Banks in Sustaining Economic Recovery and in Achieving Financial Stability”, Journal of Applied Studies in Finance, (forthcoming).

Siregar, R., (2010), “Trade Financing and Export Performance: Experiences of Indonesia, Korea and Thailand”, a Study Prepared for the Economic Research Institute for ASEAN and East Asia(Jakarta, Indonesia).