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Early Warning System in ASEAN Countries Using Capital Market Index Return: Modiied Markov Regime Switching Model

Indonesian Capital Market Review

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Title Early Warning System in ASEAN Countries Using Capital Market Index Return: Modiied Markov Regime Switching Model
 
Creator Imam Wahyudi; Department of Management, Faculty of Economics, University of Indonesia
Rizky Luxianto; Department of Management, Faculty of Economics, University of Indonesia
Niken Iwani Suryaputri; Department of Management, Faculty of Economics, University of Indonesia
Liyu Adhika Sari Sulung; Department of Management, Faculty of Economics, University of Indonesia
 
Subject Capital Market
 
Description Asia's  inancial  crisis  in  July  1997  affects  currency,  capital  market,  and  real  market throughout  Asian  countries.  Countries  in  southeast  region  (ASEAN),  including  Indonesia, Malaysia, Philippines, Singapore, and Thailand, are some of the countries where the crisis hit  the  most.  In  these  countries,  where  inancial  sectors  are  far  more  developed  than  real sectors  and  the  money  market  sectors,  most  of  the  economic  activities  are  conducted  in capital  market.  Movement  in  the  capital  market  could  be  a  proxy  to  describe  the  overall economic  situation  and  therefore  the  prediction  of  it  could  be  an  early  warning  system  of economic crises. This paper tries to investigate movement in ASEAN (Indonesia, Malaysia, Philippines,  Singapore,  and  Thailand)  capital  market  to  build  an  early  warning  system from inancial sectors perspective. This paper will be very beneicial for the government to anticipate the forthcoming crisis. The insight of this paper is from Hamilton (1990) model of regime switching process in which he divide the movement of currency into two regimes, describe the switching transition based on Markov process and creates different model for each regimes. Differ from Hamilton, our research focuses on index return instead of currency to  model  the  regime  switching.  This  research  aimed  to  ind  the  probability  of  crisis  in  the future by combining the probability of switching and the probability distribution function of each  regime.  Probability  of  switching  is  estimated  by  categorizing  the  movement  in  index return  into  two  regimes  (negative  return  in  regime  1  and  positive  return  in  regime  2)  then measuring  the  proportion  of  switching  to  regime  1  in  t  given  regime  1  in  t-1  (P11)  and  to regime 2 in t given regime 2 in t-1 (P22). The probability distribution function of each regime is modeled using t-student distribution. This paper is able to give signal of the 1997/8 crisis few periods prior the crisis. activate javascript
 
Publisher Management Research Center, Department of Management, Faculty of Economics and Business, U
 
Contributor —
 
Date 2014-08-25
 
Type Peer-reviewed Article
 
Format application/mbox
 
Identifier http://journal.ui.ac.id/index.php/icmr/article/view/3623
 
Source Indonesian Capital Market Review; Vol 3, No 1 (2011): January 2011
 
Language en