Some argue that we understate the significance of the Asian crisis. So, here are three graphs of equity market correlations in moments of rather severe crisis. The unit in each is 12 month percent change.
1. Black Monday, October 1987. Biggest Single Day Correction in US History. Notice that the FTSE and Hang Seng follow the US down. Notice the correlation 10 years prior to the 1997 Asian crisis.
2. The Asian Crisis, 1997. Notice the separation. Hong Kong falls sharply. The US and UK give back a few gains but then recover very quickly. No banks failed in the US as a result of this crisis. And I note that this Asian crisis was probably the most severe to occur prior to 2008. And yet
3. US Subprime, 2007-09. The rest of the world follows the US down.
So, is Greece more like Thailand, or is Greece more like the United States? We think Greece is more like Thailand.
1 comments:
Since I've been made to teach research methods next semester (don't ask), I have two "construct validity" concerns here.
First, why use stock market changes as shorthand for the systemic effects of crises? Equity valuations are affected by any number of things. For instance, one region's stocks may have had higher P/E ratios than the rest and were thus due for a larger correction when investors took fright.
Second, I am not sure if the Hang Seng index was representative of "Asia" at the time. The HKMA had to fend off a pretty large speculative attack on Hong Kong's currency board--an FX system that remains quite unique to it in Asia.
Similar concerns with the others--pan-regional indices would probably paint a more accurate picture of regional trends.
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