BEHAVIOR OF EQUITY AND MONEY MARKETS DURING THE ASIAN CRISIS

Abstract

This paper analyzes the effect o f the Asian crisis on the financial integration o f capital and money markets across twelve countriesfrom Asia, Europe and the Americas. Through a comparison ofdaily returns of equity and money markets from before and after the advent of the Asian crisis in July J997, Granger causality and principal components analyses are used to explore the effect ofthe crisis on the co-movement of returns. Evidence points to an increased co-movement in the equity markets returns thus highlighting the adverse effect o f global shocks on the effectiveness o f international diversification strategies. For the money markets, the results show a reduction in interdependence following the crisis. Evidence of reduced co- movement in money markets could be explained by the increased dispersion ofmonetary policies during the Asian crisis.