Have East Asian stock markets calmed down? Evidence from a regime-switching model

The 1997-98 East Asian crisis was accompanied by high volatility of East Asian stock returns. This paper examines whether the volatility has already come down to the level of the years before the crisis. We use a regime-switching model to account for possible structural change in the unconditional variance, for instance, due to the Asian crisis. We find that in June 2000 the stock markets of Indonesia, South Korea, Malaysia, and Thailand, but not the Philippines, were still in the high-volatility regime initiated by the 1997-98 crisis. Hence, markets have not yet calmed down. However, volatility is decreasing and the volatility gap between the crisis and the years before has been closed by about 60%. We explain this, including the exceptional position of the Philippines, in terms of the financial structural reforms in Asia.