The impact of the Asian financial crisis on foreign exchange market efficiency: The case of East Asian countries

Bang Nam Jeon, Byeongseon Seo

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37 Citations (Scopus)


This paper investigates whether the Asian financial crisis in the second half of 1997 affected the foreign exchange market efficiency in four Asian countries hit hard by the crisis: Thailand, Indonesia, Malaysia and Korea. We find that empirical evidence based on the bivariate and multivariate cointegration estimations using the high-frequency data from January 1996 to February 2001 is mostly consistent with the across-country efficient market hypothesis in the Asian foreign exchange markets during the whole sample period except the short period immediately after the July 1997 crisis. Within-country market efficiency also appears to have become weaker immediately after the crisis than before the crisis, but market efficiency was recovered quickly, evidenced by the regained cointegrating relationship for the pairs of the spot-forward exchange rates in the Asian countries. The findings of the threshold effects in the forward market equation and asymmetrical responses of the spot rate to the forward spread imply that there has been a strong force of recovering new equilibrium exchange rate levels in the Asian foreign exchange markets once the rates have been disturbed, especially when their currencies are significantly undervalued compared to the rationally expected level of exchange rates.

Original languageEnglish
Pages (from-to)509-525
Number of pages17
JournalPacific Basin Finance Journal
Issue number4
Publication statusPublished - 2003 Aug
Externally publishedYes

Bibliographical note

Funding Information:
Earlier versions of this paper have been presented at the 2002 KAEA-ASSA annual meetings, Atlanta, GA, in January 2002, and the 2002 APFA/PACAP/FMA Finance Conference, Tokyo, Japan, in July 2002. The authors appreciate the helpful comments from Bong Soo Lee (University of Houston), Wen-Chung Guo (Yuan Ze University, China) and the Program participants. The usual caveat applies. The authors are grateful for the financial support of the Brain Korea 21 Program at Soongsil University, Seoul, Korea, and Faculty Summer Research Support (Jeon) from Bennett S. LeBow College of Business, Drexel University.


  • Asian financial crisis
  • East Asia
  • Foreign exchange market efficiency

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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