Stock Returns and the Macroeconomic Environment Prior to the Asian Crisis in Selected Southeast Asian Countries

Abstract

This paper investigates the relationship between domestic macroeconomic variables and stock excess returns to evaluate the effects of macroeconomic variables on excess returns and assess market efficiency in the Southeast Asian economies prior to the 1997 Asian crisis. Based on various tests, monthly stock excess returns are best specified by autoregressive conditional heteroskedasticity-type models. The null hypothesis of a martingale process is rejected, and some macroeconomic variables are identified that seem to have a certain predictive power for excess returns. Moreover, it appears that Asian monetary authorities seem to have had a credibility problem in keeping inflation within a target range. The lack of credibility and transparency may have contributed to the 1997 crisis.

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