Abstract
M.Com. (Financial Economics)
This paper studies the efficacy of bank bailouts in restoring financial stability during financial crises. Stability is measured in terms of stock market volatility. The volatility dynamics associated with banking crises in South Korea, Malaysia, Indonesia, Thailand, and the United States (US) are investigated.
Using daily returns data from 1 January 1997 to 8 October 2012, two specific methods are used to measure the impact of bailouts on financial stability. Firstly, dummy variables that account for the timing of bailout policies are included in the variance equation of Exponential Generalised Autoregressive Conditional Hetereoskedasticity (EGARCH) models that are estimated for the overall stock market index of each of the affected countries. Secondly, EGARCH models are estimated using 30-day rolling windows in order to control for shifts in unconditional volatility that may result from bailouts. The Spearman Rank-Order correlation test is used to assess the rank-order relationship between the EGARCH 30-day rolling window conditional volatility and actual volatility, which is estimated as a 30-day moving average of squared returns.
Three main findings form the conclusion of this study. The first is that, in some cases, bailouts are successful in reducing volatility in some of the East Asian and US stock markets. Secondly, although the creation of centralised asset management companies and the implementation of guarantees of liabilities as bailout policies are effective at reducing volatility in the East Asian markets, closures of, and interventions in, banks and other financial institutions, liquidity support, and capital support are not effective in reducing volatility in the East Asian markets. This illustrates that different bailout policies have different impacts on volatility. Finally, although bailout policies reduce volatility, liquidity support, and capital support, bailout policies are more effective at reducing volatility in the United States than in the East Asian countries. This illustrates that the same bailout policies cannot be used in different types of economies, namely developed and developing economies, with the hope of the same outcome being realized.