Upload
bruce-boone
View
216
Download
0
Tags:
Embed Size (px)
Citation preview
The Evolutionary Synchronization of Exchange
Rates System in ASEAN+6
Xiaobing Feng Haibo Hu
Xiaofan [email protected]
Motivation
• Formulating a single currency in East Asia is desirable but challenging
Reasons
• Lack of political commitments in the region,
• Diversity of exchange rate regimes
• Makes it hard to coordinate among nations
Table 1 Diversity and Variation of Exchange Rate Regimes in ASEAN+6
Country Prior to 1997.7 Crisis Year 2005 Current
1 Brunei Darussalam Single Currency Peg Single Currency Peg Single Currency Peg
2 China Managed Floating Single Currency Peg Crawling Peg
3 Hong Kong Currency Board Currency Board Currency Board
4 Indonesia Free Floating Managed Floating Managed Floating
5 India Free Floating Managed Floating Managed Floating
6 Japan Free Floating Free Floating Free Floating
7 Korea Republic Free Floating Free Floating Free Floating
8 Malaysia Managed Floating Single Currency Peg Managed Floating
9 Nepal Single Currency Peg Single Currency Peg Single Currency Peg
10 Singapore Managed Floating Managed Floating Managed Floating
11 Sri Lanka Managed Floating Free Floating Managed Floating
12 Thailand Managed Floating Managed Floating Managed Floating
13 Tai Wan Territory Free Floating Free Floating Free Floating
14 United Kingdom Free Floating Free Floating Free Floating
15 United States Free Floating Free Floating Free Floating
Motivation
• Very little synchronization or co-movement of exchange rates among these countries.
• Whether currencies in the region fluctuate in a completely different manner or they behave in a synchronized pattern?
Literature Review
• [1]X,Li Y,Jin and G.R.Chen , Physica A, 343(2004)573.
• [2]R.McKinnon. G. Schnabl 2003 “Synchronized Business Cycles in East Asia: Fluctuations in the Yen/Dollar Exchange Rate and China’s Stabilizing Role” Working paper, Stanford University.
• [3] S,Kang,Y Wang, and R.Y.Deok 2002 “Exchange Rate Co-movements and Business Cycle Synchronization between Japan and Korea” Asian Development Bank Institute Research Paper40.
Two Questions
• Do they still stick to the “Asian Dollar Standard” or they will adopt a different regime like China?
Two Questions
• If they decide to reduce the correlation with the US Dollar, do they act independently or they will take coordinated collective action?
Methodology
• Random matrix theory
• Correlation Matrix
• Cross Sample Entropy,Cross Entropy
Stationary Tests
21 1[1 exp( )]t t t ty y y
13
1
tjt
p
jjt yypy
Table 2 Results of nonlinear unit root tests for exchange rates using KSS statisitcs
Country names KSS statistics
Brunei -1.408518459 China Mainland (3) -1.713230818 China Hong Kong (4) 3.050737561* Indonesia(4) -0.551750164 India (5) -1.304694658 Japan (4) -2.742675003* South Korean (5) -1.696322591 Sri Lanka (3) -1.360224568 Malaysia(3) -1.994843853 Nepal (6) -0.476861129 Singapore(5) -2.154819119 Thailand (4) -0.218946754 Taiwan(5) -1.707901336 United States of America(6) -3.492532559* United Kingdom/Great Britain(5) -2.697788862*
Transformed to be stationary
)()()( tLnyttLnyt ttir
Table 3 The Correlation Coefficient Calculations of Asian Currencies
Time Average
Corr-Coef
Max with
Dollar
Max
with
RMB
Max
with Yen
Min with
Dollar
Min with
RMB
Min with
Yen
Before
Reform
0. 2547
0.9707
0.5624
0.3368 -0.0610
0.0245
-0.0597
After
Reform
0.2851* 0.8785
0.6516
0.1386
-0.0426
-0.0335
-0.0956
Total
Period
0.2663 0.9710
0.5779
0.2153
-0.0381
-0.0133
-0.0492
Note: “ Average Corr-Coef ” denotes the average correl ati on coeffi ci ents of al l currenci es; “ Max
wi th Dol l ar” denotes the maxi mum correl ati on coeffi ci ents between US dol l ar and Asi an currenci es;
“ Mi n wi th Dol l ar” denotes the mi ni mum correl ati on coeffi ci ents between US dol l ar and Asi an
currenci es.
Table 4. Correlation coefficients of exchange rate movement from 1997 to 2009
Year Correlation
coefficients
Year Correlation
coefficients
1997 0.1804 2004 0.2099 1998 0.1682 2005 0.2604 1999 0.207 2006 0.243 2000 0.1593 2007 0.1992 2001 0.2303 2008 0.2858 2002 0.2496 2009 0.2494 2003 0.1862
Cross Sample Entropy
Table 5 Counts comparison of cross sample entropy
Et+1-Et>0 (prior to) Et+1-Et<0 A=0;B=0;A=0&B=0
(1)Cross sample
Entropy
43/210 39/210 128/210
(2)Adjusted Cross
sample Entropy
69/210
50/210
91/210
Cross Entropy
• where p is the “true” distribution, e.g. US dollar exchange rate distribution;
• q is a given probability distribution, for example RMB exchange rate distribution.
• is the Kullback-Leibler divergence of q from p (also the relative entropy). When p is the normal distribution with mean 1 and standard deviation 1 and q is the normal distribution with mean 2 and standard deviation 2,
KL( , ) [ log ] ( ) ( )pH p q E q H p D p q
Analytic Representation
2 2 2 2 2 2 21 1 2 2 1 2 1 2( , ) 1/ 2(ln(2 )) ( ) / 2 1/ 2( / 1 ln( / ))H p q e
Table 6 Counts comparison of cross entropy.
Et-Et+1>0 Et-Et+1<0
(1) Cross entropy(normalize )
124/210
86/210
(2) Cross entropy(normalize )
72/210
138/210
(3) Cross entropy (normalize
and )
108/210
102/210
RMT
j i
ijji
ij
RRRRC
0 1 2 3 4 5 60
0.2
0.4
0.6
0.8
1
1.2
1.4
Eigenvalue
Pro
ba
bili
tyFigure 1 Eigenvalue Density before Reform
Figure 2. Number of Eigenvalues outsied Random Prediction before Reform
0
1
2
3
4
5
6
1 2 3 4 5 6 7 8 9 10 11 12 13
14 15
BeforeReform
Random
0 0.5 1 1.5 2 2.5 3 3.5 4 4.50
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Figure 3.Eigenvalue Density After Reform
Eigenvalue
Pro
babi
lity
Figure 4. Number of Eigenvalues outside Random Prediction after Reform
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
AfterReform
Random
Conclusion
• 1. Exchange rate markets in Asia are surprisingly collectively correlated.
• The temptation of central bank intervention in the foreign exchange markets plays a role for such an outcome,
• The relative thin markets could be another reason that attributes to the inefficiency.
Conclusion
• 2.After the China exchange rate reform, which aims to increase the flexibility of exchange rate movements, the deviation from the RMT prediction remains the same.
Conclusion
• The interaction among Asian currencies has been intensified;
• The dependence upon US Dollar has been weakened.