Return Relationships between Listed Banks and Real
Estate Firms: Evidence from Seven Asian Economies
Department of Finance, Yuan Ze University, Chung-Li, Taoyuan, Taiwan
RAYMOND W. SO
Department of Finance, Chinese University of Hong Kong, Shatin, Hong Kong
This paper studies the return relationships between listed banks and real estate ﬁrms in seven Asian economies
before and after the Asian ﬁnancial crisis. We ﬁnd that listed banks were exposed to real estate risk both before
and after the crisis, but that the exposure increased in the post-crisis period. After the crisis, the hidden risk of
real estate collateral in the bank lending process was explicit, as was evidenced by the increased sensitivity and
the structure break. In terms of causality, the returns of listed real estate ﬁrms are found to Granger-cause the
returns of listed banks. However, there is mixed evidence as to whether listed bank returns Granger-cause the
returns of listed real estate ﬁrms. The study is signiﬁcant because it indicates the importance of lending policies
in relation to the real estate market in establishing a healthy ﬁnancial system.
Key Words: real estate markets, mortgage lending, Asian ﬁnancial crisis, banking systems, non-performing
On July 2, 1997, a ﬁnancial crisis began in Thailand when the Baht depreciated by 30%
against the US dollar. The contagion effects of the Thai crisis soon spread to other Asian
economies, including Hong Kong, Indonesia, South Korea, Malaysia, Singapore, and
Taiwan. The Korean Won fell by about 50% of its pre-crisis dollar value, and the
Indonesian Rupiah fell an astonishing 80%.
Explanations for the Asian crisis usually focus on fundamentals, moral hazard, adverse
selection, and self-fulﬁlling liquidity theories. Kane (2000) argues that the crisis was
triggered by the agency problem that was embedded in politically directed loans,
offshore innovations in ﬁnancial technology, and regulatory systems. Kwack (2000)
shows that increases in the three-month LIBOR interest rate and the high non-performing
loan rates of the banks increased the banks’ exposure to bad loans, thus triggering the
crisis. Kho and Stulz (2000) examine the effect of the crisis on bank stocks and show that
stock market movements explain the poor performance of banks in East Asia, while
currency exposures only adversely affected banks in Indonesia and the Philippines.
Chowdhry and Goyal (2000) argue that the crisis reﬂected institutional inefﬁciencies in
The Journal of Real Estate Finance and Economics, 31:2, 189–206, 2005
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.