IMPACTS OF CRISES ON DYNAMIC LINKAGES BETWEEN FINANCIAL AND CAPITAL MARKETS

This paper studies the cointegration and bivariate causality relationships between capital and financial markets for the seven Asian countries, which were badly hit by the Asian Financial Crisis (AFC). Our empirical results show that, before the AFC, all countries, except the Philippines and Malaysia, experienced no evidence of Granger causality between the exchange rates and the stock prices. However, the appearance of the causality, but not the cointegration, between the capital and financial markets becomes stronger during the AFC period. Surprisingly, after the September 11 terrorist attack (911), the causality relationship between these two markets reverts back to normal as in the pre-AFC period and their cointegration relationship is weakened. From our findings, it can be inferred that: First, AFC has a bigger and more direct impact on the causality relationship between the financial and capital markets in Asia; Second, the 911 basically had no impact on the causality relationship between these two markets; and third, the Asian financial and capital markets have become more mature and efficient after the 911 crisis