Creditor moral hazard in stock markets: Empirical evidence from Indonesia and Korea

This paper expands on the work of Sarno and Taylor [1999. Hot money, accounting labels and the permanence of capital flows to developing countries: an empirical investigation. Journal of Development Economics 59, 337-364; Moral hazard, asset price bubbles, capital flows, and the East Asian crisis: the first tests. Journal of International Money and Finance 18, 637-657] by developing an IMF-induced creditor moral hazard framework in stock markets under alternative assumptions of asset price bubbles and domestic implicit guarantees. To do so, it employs IMF-related news associated with program negotiations and program approval. Using daily stock returns for Indonesia and Korea, we estimate the changes in stock returns in response to IMF-related news during the Asian crisis period. Some of the results regarding Korea and, to a lesser extent, Indonesia are consistent with the creditor moral hazard interpretation that assumes implicit guarantees and asset price bubbles. (c) 2005 Elsevier Ltd. All rights reserved.