Movements in stock prices in East Asia during the crisis in 1997-98 were triggered by both local and neighbor-country news. Having the highest impact was news about agreements with international organizations and credit rating agencies. But some changes seem to have been driven by herd instincts in the market itself, including overreactions to bad news.
In the chaotic financial environment of East Asia in 1997–98, daily changes in stock prices of as much as 10 percent became commonplace. Kaminsky and Schmukler analyze what type of news moved the market in those days of extreme market jitters.
They find that movements are triggered by both local and neighbor-country news. News about agreements with international organizations and credit rating agencies have the most weight.
Some of those large changes in stock prices, however, cannot be explained by any apparent substantial news but seem to be driven by herd instincts in the market itself.
On average, the one-day market rallies are sustained while the largest one-day losses are recovered - suggesting that investors overreact to bad news.
This paper—a product of Macroeconomics and Growth, Development Research Group—is part of a larger effort in the group to understand financial markets and financial crises. The study was funded by the Bank's Research Support Budget under research project "Capital Market Crises and Information" (RPO 682-26). Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Sandra Holt, room I8-122, telephone 202-473-7859, fax 202-522-2119, Internet address sholt@worldbank.org. Sergio Schmukler may be contacted at sschmukler@worldbank.org. (39 pages)
The full report is available in PDF format.