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How Useful Is the Psychology of Investors in Explaining the Asian Financial Crisis?

In: Historical Events

Submitted By wibblywobbly
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The statement ‘everything depends on the psychology of investors’ is useful in explaining the AFC. It started with Thailand, where the overvalued baht was pegged to the US dollar. An appreciation of the USD put strain on the Thai government’s position to maintain the peg, and coupled with Thailand’s current account deficit, investors and currency speculators suspected an imminent devaluation. The loss of investor confidence and speculation led them to dispose of their baht for the USD, and the baht further depressed in value. By this time, the Thai government was no longer able to maintain the overvalued baht, and international capital flew out of the country, compounding the decline of stock and property market indices. The government was forced to release the peg, which triggered off the AFC. The loss of investor confidence was like a contagion that spread over the region- many investors did not just invest in one country, but in multiple countries in SEA, and the situation in Thailand had them pulling out of investments in the other countries as well when they re-assessed the risk factors in Thailand’s neighbouring countries and saw similar symptoms afflicting them. Indonesia was the next to be hit by speculative runs after Thailand. Thailand suffered from a -54.6% rate of change in the value of its baht against the USD, but Indonesia suffered the wildest fluctuation in the value of the rupiah, with a -83.6% rate of change. This contagious loss of confidence and panic effect caused by investor psychology led to domestic elites moving their capital out of the region- within the first year of the crisis, over $200bn had fled from the five SEA markets, an astounding 18% of their combined GDPs. While investor psychology was the trigger to the AFC, it is useful in explaining the AFC only to a certain extent as it explains why the AFC started when it did, but not why…...

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