The collapse of the Malaysian exchange rate and the stock market during the Asian financial crisis had elevated uncertainties in the financial market and increased the instability of the bank stock returns. Whilst it is commonly known that the crisis rooted from a complex interplay of various factors, there seemed to exist some fundamental and systemic problems in the banking sector. Besides, the challenges from the wave of financial globalization also urged the authorities to conduct structural enhancement in the sector. This paper briefly outlined the main aspects of the Malaysian bank merger program, and tracked as well as evaluated the effects of the program on the volatility of the Malaysian bank stock returns. It was found that the proposed merger did bring about stability for the banks’ stock prices and returns, especially after the initial consolidation announcement of 29 July 1999 based on the estimations of conditional variances. The analysis also documented a persistency positive risk returns tradeoff and asymmetrical news effects in the bank stocks before the announcement. After the announcement, bank stocks clearly enjoyed a huge reduction in the volatilities and the asymmetrical news effects.
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