Incidences of Speculative Attacks on Rupiah During The Pre- and Post-1997 Financial Crisis

The objective of this study is to identify and date the episodes of high speculative attack periods against the Indonesian rupiah over the last fifteen years (i.e. from 1985 to 2003). From the findings, we hope to address the following set of questions. Had rupiah indeed been stable prior to its meltdown in the third quarter 1997? Arguably a more relevant question to be addressed at this point is whether the rupiah has stabilized, as measured by a relatively moderate EMP index, since its worst fall in late 1997? This study also hopes to introduce a simple measurement index to detect the presence of market pressures in the foreign exchange market, and to illustrate a reliable methodology to estimate a “threshold” separating low market pressures from the extreme ones.Currency Crisis; Exchange Market Pressure; Speculative Attacks; Extreme Value Theory; Rupiah.

Successful and Unsuccessful Attacks: Evaluating the Stability of the East Asian Currencies

The key objective of our study is to re-examine again the stability of selected East Asian currencies. Had there been any other attacks on these currencies prior to their meltdowns in 1997? Equally important, have the currencies stabilized during the post-1997 crisis? To address these questions, we adopt the concept of exchange market pressure (EMP) index of Kaminsky, Lizondo, and Reinhart (1998). Due to non-normality of the statistical distribution of the EMP indices in general, this study applies the Extreme Value Theory (EVT) as proposed by Huisman, Koedijk, Kool, and Palm (2001). Lastly, we document events that arguably contribute to speculative attacks on these currencies.Currency Crisis; Exchange Market Pressure; Extreme Value Theory; East Asia.

Incidence of Speculative Attacks on Rupiah During the Pre- and Post- 1997 Financial Crisis

The objective of this study is to identify and date the episodes of high speculative attack periods against the Indonesian rupiah over the last fifteen years (i.e. from 1985 to 2003). From the findings, we hope to address the following set of questions. Had rupiah indeed been stable prior to its meltdown in the third quarter 1997? Arguably a more relevant question to be addressed at this point is whether the rupiah has stabilized, as measured by a relatively moderate EMP index, since its worst fall in late 1997? This study also hopes to introduce a simple measurement index to detect the presence of market pressures in the foreign exchange market, and to illustrate a reliable methodology to estimate a ''threshold'' separating low market pressures from the extreme ones.currency crisis; exchange market pressure; speculative attacks; extreme value theory; Rupiah

Exchange Market Intervention and Evidence of Post-Crisis Flexible Exchange Rate Regimes in Selected East Asian Economies

By examining exchange market intervention activities of the monetary authority of each country, we revisit an old debate on whether crisis-effected countries in East Asia, namely Indonesia, Korea, Singapore and Thailand, have gone back to their pre-1997 rigid exchange rate policies, or, instead, have they actually moved to a more flexible regime? More importantly, if indeed there has been a shift from a rigid to a more flexible one, was the move a voluntary one, or mainly due to the presence of high market pressures on the currency? Given the absence of publicly available information on intervention in the foreign exchange market during the observation period, we propose an index of central bank intervention activity in the exchange market that also includes overnight market rates. Apart from applying the Markov switching ARCH and the extreme value theory methodologies to the construction of the index, thresholds of exchange rate regimes are also generated and utilized to systematically classify the types of exchange rate regimes that these East Asian countries adopted during the post-1997 financial crisis.Exchange Market Intervention; Exchange Rate Regimes; East Asian Countries

Extreme Value Theory and the Incidence of Currency Crises

A common feature of numerous studies on early warning systems (EWS) of currency crisis is the use of an index of exchange market pressure, defined as a weighted average of the rate of depreciation, the monthly percentage changes in international reserves, and sometimes the inclusion of the monthly change in the interest rate, in order to identify and proxy the occurrence of currency crisis. Crucial to this approach is the appropriate definition of a currency crisis, and the literature has usually defined currency crisis occurring when the measure of exchange market pressure exceeds a certain threshold. The main theme of the paper is that not only is the use of a threshold in defining currency crisis as arbitrary, but a much more careful examination of the basic statistical distribution of the measures of exchange market pressure will reveal that the conventional method of defining currency crisis is statistically flawed or inaccurate in capturing the 'true' dispersion of any given exchange market pressure series. This study applies an alternative statistical method known as Extreme Value Analysis (EVA) to three different weighting schemes popularly adopted in the literature in constructing exchange market pressure indexes, namely the Eichengreen-Rose-Wyplosz (ERW), the Sachs-Tornell-Velasco (STV) and the Kaminsky-Lizondo-Reinhart (KLR). The application of EVA leads to more incidences of currency crises being identified or 'captured' compared to the conventional method across a number of countries in East Asia and Latin America from 1985 to 2003Extreme Value Theory, Currency Crises, Exchange Market Pressure, East Asia, Latin America

Intervention index and exchange rate regimes: the cases of selected East-Asian economies

Given the absence of publicly available information on foreign exchange intervention, we propose an index of central bank intervention in the exchange market to classify exchange rate regimes adopted by four East Asian economies. We revisit an old debate on whether these crisis-effected East Asia countries have indeed returned to their pre-1997 rigid exchange rate policies. If, instead, there had been evidences of a policy shift to a more flexible regime, was the move voluntary, or mainly due to high market pressures on the currency? Our findings clearly reject the “hollow middle” hypothesis.Exchange Market Intervention; Exchange Rate Regimes; East Asian Countries

How Should We Bank With Foreigners? An Empirical Assessment of Lending Behaviour of International Banks to Six East Asian Countries

The possible crucial role of international bank lending in the transmission of adverse economic disturbance from advanced economies to emerging economies in the recent global financial crisis has once again placed this type of capital flows into sharper scrutiny both in academic and policy discussions. We construct macro-and micro-panel data on international bank lending to six Asian economies, viz., Indonesia, Korea, Malaysia, Philippines, Singapore and Thailand, to analyze a number of objectives. We first examine the influence of a number of critical determinants not only to overall international bank lending but also to cross-border bank lending, and obtained one critical finding in this part of the study that cross-border lending by international banks tend to pull-out from host economies during difficult times in source economies, whereas such retrenchment are not evident on an aggregated basis. This may suggest that encouraging brick-and-mortar affiliates of international banks to ‘set up shop’ in recipient economies may be the judicious choice for these economies. We next critically examine the difference between subsidiaries and branches of international banks in terms of their ability to shield themselves from the financial difficulties of their global parent banks and thus their ability to continue lending in destination markets. According to our results, foreign bank subsidiaries are more capable in this regard. This finding carries with it the obvious attraction of favouring an organizational banking structure that is biased towards subsidiaries. However, national banking regulators should remember that apart from encouraging a host of other domestic and cross-border initiatives, encouraging the entry of brick-and mortar subsidiaries of international banks should not viewed as a panacea to the financial stability concerns not only in Asia but also across emerging markets in general.

Tranquil and Crisis Windows, Heteroscedasticity, and Contagion Measurement: MS-VAR Application of the DCC Procedure

The key objective of this study is to show that two potential shortcomings of the Determinant of Change in Covariance Matrix (DCC) procedure of Rigobon (2003), namely with the arbitrary determination of the windows, i.e., tranquil and crisis periods and the violation of its heteroscedasticity assumption under the null, can be simultaneously addressed via a simple incorporation of a Markov-Switching Vector Autoregressive (MS-VAR) approach into the overall DCC procedure. To demonstrate this, we revisit the period around the time of the East Asian crises using daily stock exchange of Indonesia, Malaysia, Philippines, Thailand, Singapore, Korea, Hong Kong and Taiwan and test whether there is a significant break or discontinuity in the stock exchange returns of the eight East Asian markets during crisis periods, especially around the time of the 1997 financial crises. In contrast to that of Rigobon (2003), our results show that the propagation of shocks shifted significantly starting with the onset of the sharp decline in the Hong Kong stock market.contagion, Markov-switching vector autoregressive, determinant of the change in the covariance matrix, stock returns

Fear of Appreciation in East and Southeast Asia: The Role of the Chinese Renminbi

The study brings into light the evidence of a fundamental role of the Chinese renminbi in shaping the exchange rate behaviour of other major Asian currencies. The results obtained suggest that there is an additional dimension to the ‘fear of appreciation’ or ‘fear of floating-in-reverse’ behaviour, initially coined by Levy-yeyati and Sturzenegger (2007) with regard to the cases of these major Asian currencies. In particular, it is found that there is a greater degree of aversion to appreciation of these same Asian currencies, specifically, the Philippine peso and the Thailand baht against the renminbi than against the US dollar. This heightened fear of appreciation against the Chinese currency confirms that trade competition indeed matters in this part of the world and that the fear continues to play a central role in the exchange rate management behaviour of major Asian currencies. This is understandable as the rising role of China as a major trading hub in the region as well as globally, renders greater influence to the renminbi on the rest of the currencies in the region.

Cross-border bank lending to selected SEACEN economies: an integrative report

This study seeks to address a number of rising policy concerns from the aftermath of the recent subprime crisis. Did foreign bank lending decline sharply and transmit the financial shocks from the advanced economies to the SEACEN emerging markets? Was the decline driven by the drying-up in supply of cross-border loans or more by the sharp decline in the demand for this funding? Does greater exposure of foreign banks to a host country lowered the sensitivity of its claims to shocks originating from their own economies? Do bank claims to a country affected by the aggregate changes in claims to another country? How about the stability of these flows? In short, this study aims to ascertain the various multi-faceted aspects of this international bank lending.International Bank Claims; Cross-border Lending; Bank Exposure; Subprime crisis; East and Southeast Economies.