Transformation of External Shocks and Capital Market Integration
The role of a well-developed stock market is clearly of considerable importance in providing finance for an economy’s industrial sector. This is likely to be especially so for a transitional economy where alternative sources of finance, such as retained profits or a well developed market for corporate bonds, are limited. However, much recent empirical work on stock markets suggests that they are subject to relatively long swings away from fundamentals-based values. This can clearly produce all manner of distortions within an economy and this is perhaps exemplified most clearly when a particular stock market bubble collapses and this precipitates a downturn in the economy. The recent collapse of a number of East Asian stock markets gives important lessons about how stock markets interact. Although the causes of the East Asian crisis are still the subject of a robust debate, there can be little doubt that the collapse of the stock markets in these countries has at the very least exacerbated recessionary tendencies. It is also widely accepted that the stock market collapse in East Asia has had contagion effects in the rest of the world, with markets in Europe and North America being affected at the time of the crisis.
KeywordsStock Market Stock Return Vector Error Correction Model Transitional Economy Stock Price Index
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