Contagion Effects of Subprime Crisis: A Singapore Perspective

19
Contagion Effects of Subprime Crisis: A Singapore Perspective Seow Eng ONG and Hui Pin TAY

description

Contagion Effects of Subprime Crisis: A Singapore Perspective. Seow Eng ONG and Hui Pin TAY. Introduction. The U.S subprime market crisis (SPC) started as a US-centric problem SPC gradually spilled over to the financial sector - PowerPoint PPT Presentation

Transcript of Contagion Effects of Subprime Crisis: A Singapore Perspective

Page 1: Contagion Effects of Subprime Crisis: A Singapore Perspective

Contagion Effects of Subprime Crisis: A Singapore Perspective

Seow Eng ONG and Hui Pin TAY

Page 2: Contagion Effects of Subprime Crisis: A Singapore Perspective

Introduction

• The U.S subprime market crisis (SPC) started as a US-centric problem

SPC gradually spilled over to the financial sector Casualties: Bear Stearns, Goldman Sachs, Lehman

Brothers, Merrill Lynch and Morgan Stanley International markets tend to react to news

emanating from the US as investors price in expectations of how the crisis would affect their respective markets

Page 3: Contagion Effects of Subprime Crisis: A Singapore Perspective

Impact of SPC events on Spreads

Page 4: Contagion Effects of Subprime Crisis: A Singapore Perspective

Objective of Study

• To examine the contagion effects of news on US subprime crisis on Singapore stocks in general and property stocks in particular.• Identify US subprime crisis related news events• Evaluate the impact of news event on Singapore

stocks • Broad market – Straits Times Index (STI)• Property / Real Estate stocks (SRE) • Real Estate Investment Trust (SREIT)

Page 5: Contagion Effects of Subprime Crisis: A Singapore Perspective

Some prominent names

• Bear Stearns• Lehman Brothers• Merrill Lynch• Morgan Stanley• Goldman Sachs• Fannie Mae & Freddie Mac• AIG• UBS

Page 6: Contagion Effects of Subprime Crisis: A Singapore Perspective

Methodology

• Key word search from Financial Times (London-based) via Factiva

• Period: Sep 2007 through Aug 2008• Stock data from 2005 – 2008• Events are classified as good news or

bad news

Page 7: Contagion Effects of Subprime Crisis: A Singapore Perspective

Timeline

• The day starts in Asia• Events from US on day t-1 get reported

on day t but affect Singapore stocks on day t

Page 8: Contagion Effects of Subprime Crisis: A Singapore Perspective

Note:• US stock returns (t-1) affect SIN stock

returns (t)• SRE and SREIT returns could be

affected by overall SIN stock returns (STI)

• Dummy variables denoting good and bad news (Dg and Db)

Page 9: Contagion Effects of Subprime Crisis: A Singapore Perspective

Distribution of Events

News Days

Average returns

(STI)

Average returns(SRE)

Average returns

(SREITs)

Average returns

(S&P500)

Good 19 0.31% 0.23% 0.26% 0.03%

Bad 120 -0.10% -0.23% -0.12% -0.15%

Good and

Bad News24 -0.20% -0.15% -0.25% -0.03%

Collection of news spans from 3rd September 2007 to 29th August 2008

Page 10: Contagion Effects of Subprime Crisis: A Singapore Perspective

Distribution of News Over Time

0

2

4

6

8

10

12

14

16

No.

Sep'07 Dec Mar'08 Jun

Month

Nos of Good and Bad News reported monthly

Bad

Good

Page 11: Contagion Effects of Subprime Crisis: A Singapore Perspective

SIN stock returns (2005 – 2008)

Returns on STI, SRE, SREIT

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

0.06

Mar

-05

Jun-

05

Sep-0

5

Dec-0

5

Mar

-06

Jun-

06

Sep-0

6

Dec-0

6

Mar

-07

Jun-

07

Sep-0

7

Dec-0

7

Mar

-08

Jun-

08

Returns

Qu

art

ers

STI

SRE

SREIT

S&P500

Page 12: Contagion Effects of Subprime Crisis: A Singapore Perspective

Regression 1

where • RS,t = SIN stock return on day t; S = {STI,

SRE, SREIT}• RUS,t-1 = S&P500 returns on day t-1• Dg,t = dummy variable for good news• Db,t = dummy variable for bad news

ttbbtggtUStS DdDdbRaR ,,1,,

Page 13: Contagion Effects of Subprime Crisis: A Singapore Perspective

Regression 2: orthogonalized residuals

• Repeat for returns for SREITs: RSREIT,t

ttbbtggtUStSRE DdDdbRa ,,1,,

tSREtSTItSRE bRaR ,,,

ttbbtggtUStSREIT DdDdbRa ,,1,,

tSREITtSTItSREIT bRaR ,,,

Page 14: Contagion Effects of Subprime Crisis: A Singapore Perspective

Hypotheses

• Expect good (bad) news to have positive (negative) impact on SIN stock return• For broad market (STI)• For property stocks (SRE)• But not necessarily for real estate

investment trusts (SREIT) due to defensive nature of REITs

Page 15: Contagion Effects of Subprime Crisis: A Singapore Perspective

Results: Regression 1

STI SRE SREITcoefficient t stat coefficient t stat coefficient t stat

Intercept 0.0006 1.5977 0.0009* 2.1436 0.0005 0.9426

RUS ,t-1 0.5215* 15.1323 0.5284* 12.9531 0.4662* 9.9216

Dg, t 0.0003 0.1834 0.0007 0.3821 0.0000 -0.0226

Db, t -0.0011 -1.1914 -0.0025* -2.2923 -0.0013 -1.0320

R20.19734 0.15732 0.11199

• STI and SRE returns are affected by S&P previous day return

• Bad news affect SRE return after controlling for influence from S&P asymmetric effects

• SREITs are not affected by SPC news defensive

Page 16: Contagion Effects of Subprime Crisis: A Singapore Perspective

Results: Regressing SRE and SREIT on STI

SRE SREIT

coefficient t-stat coefficient t-stat

Intercept 0.0001 0.6705 0.0000 -0.0769

R S, t 0.9835* 50.0817 0.7791* 25.8427

R2 0.7248 0.4537

• SRE stock return highly correlated (0.983) with broader STI market return

• SREIT stock return not as highly correlated (0.779)

Page 17: Contagion Effects of Subprime Crisis: A Singapore Perspective

Results: Regression 2

• Orthogonalized residuals are not influenced by US stock returns (absorbed in STI returns)

• Only bad news affect Singapore real estate stock returns (SRE), but not good news

• SREITs are not affected by SPC news

SRE SREITcoefficient t stat coefficient t stat

Intercept 0.0002 0.8176 0.0001 0.2560

RUS ,t-1 0.0155 0.6670 0.0334 0.9058

Dg, t 0.0004 0.4033 -0.0003 -0.1679

Db, t -0.0014* -2.2868 -0.0005 -0.4888

R2 0.00620.0014

Page 18: Contagion Effects of Subprime Crisis: A Singapore Perspective

Implications

• Contagion effects observed: • Global fallout effects of US subprime crisis in

2007 & 2008 felt by Singapore• This is over and above the normal market

spillover effects• Asymmetric reaction to bad news

• Singapore real estate stocks react to negative US news, but not positive news (even after controlling for STI effects)

• Defensive Singapore REITs: immune to US news

Page 19: Contagion Effects of Subprime Crisis: A Singapore Perspective

Future research

• This paper focuses on short term event study of contagion effects arising from US subprime crisis

• Longer term effects – snowballing impact on real economy, demand, etc – for future research

• Effects for other countries?