IMF events and market vol - Zentrum fr Europische...

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Zentrum für Europäische Integrationsforschun g Center for European Integration Studie s Rheinische Friedrich-Wilhelms-Universitä t Bon n B 2 7 200 1 Zentrum für Europäische Integrationsforschun g Center for European Integration Studie s Rheinische Friedrich-Wilhelms-Universitä t Bon n Walter-Flex-Straße 3 D-53113 Bon n German y Tel. : Fax : http : +49-228-73-921 8 +49-228-73-180 9 //www.zei.d e ISSN 1436-605 3 INVESTOR PANIC , IM F ACTIONS , AND EMERGIN G STOCK MARKET RETURN S
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Investor Panic, IMF Actions, and Emerging Stock Market Returns and Volatility: A Panel Investigation by Bernd Hayo* and Ali M. Kutan** * Department of Economics, Georgetown University, Washington, D.C. 20057. Phone: 202-687-6286 Fax: 202-687-6102 Email: bh22@georgetown.edu ** Department of Economics and Finance, Southern Illinois University, Edwardsville, IL 62026-1102. Phone: 618-650-3473 Fax: 618-650-3047 Email: akutan@siue.edu ________________________________________________________________________ We would like to thank Josef Brada for his useful comments and suggestions. The usual disclaimer applies.
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Abstract In this paper, we examine the reaction of stock market returns and volatility in a diverse group of six emerging markets to a set of IMF events. In particular, we test within a panel framework whether there was an “investor panic” causing a significant drop in stock market returns on the days of negative IMF events. We find that on average negative (positive) IMF news reduce (increase) daily stock returns by about one percentage point. The most influential single event is the delay of loans from the IMF, which reduces stock returns by about one and a half percentage points. IMF news do not have a significant impact on the volatility of stock markets. Thus, it appears that IMF actions and events primarily have an effect on pay-offs but not on risk, and do not appear to support the hypothesis of IMF induced “investor panics”. JEL : F300, G100 Keywords : IMF news, stock market returns, emerging markets
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1 I. Introduction International Monetary Fund (IMF) policies during the Asian financial crisis were severely criticized by some observers and the debate on the effectiveness of IMF policies has intensified since the crisis (see, for instance, Katz, 1998 and Naim, 2000). Indeed, some have argued that that the Asian crisis has, in part, resulted from a “creditor panic” created by IMF actions. Foreign creditors panic because they realize that the domestic banks cannot act as a lender of resort for dollar-denominated debts and therefore they try to move their assets out of the country as fast as possible. Sachs (1999) argues that “ … provocative IMF actions have probably contributed to the [creditor] panics” (p. 389). During the first half of the 1990s, the developing countries of East Asia were able
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IMF events and market vol - Zentrum fr Europische...

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