IS INDONESIA MORE FINANCIALLY LINKED TO THE WORLD SINCE THE ASIAN FINANCIAL CRISES?

Abstract

The 1997-98 Asian financial crises brought significant changes to the
Indonesian economy. The contagion originated in Thailand and spread
throughout the region, indicating interdependencies of the Indonesian
economy with the world’s economies but especially with those in the region.
The crisis was channelled through the financial sector, which is assumed to
be the most open sector in the economy. As a result, reform began and
changes took place in many sectors and in the policies that guided them. How
the financial integration changed over 15 years of reform is the main interest
of this study. Specifically, this study analyses the changing financial
integration in stock markets following the Asian crises. Therefore, the period
of the study is in five parts, based on the origins of the US subprime and
European crises. Using a quantitative approach, this study employs
multivariate EGARCH-M(1,1) models. These models allow us to examine
different effects of positive and negative news on financial risk in stock prices.
Daily stock data are used from the Jakarta Stock Exchange (JKSE), the
Singapore Exchange (STI), the Kuala Lumpur Stock Exchange (KLSE), the
Shanghai Composite Index (SSE), Nikkei 225 (NIKK) (Japan), the Korea
Stock Exchange (KOSPI), the Bombay Stock Exchange (SENSEX), the
German stock exchange (DAX), the London FTSE, and Standard and Poor’s
US (SP). The result of this study provides the figures showing the
development of Indonesian financial-market linkage to other countries and will
help the government to be aware of crises that are initiated by external
factors, and to be able to manage future crises.