Asian Exchange Research Articles

European and Asian monetary issues

In recent years, there has been considerable scholarly and policy community attention accorded to comparisons between the EU's monetary integration and attempts to create monetary integration in East Asia. This article examines these attempts in comparative perspective, focusing in particular on the challenges of monetary integration in Asia. After explaining recent development of financial and monetary cooperation initiatives in East Asia, such as Post-Chiang Mai Initiative and the attempt to introduce a Regional Currency Unit (RCU), this article illustrates why it is preferable for East Asia, in its attempt to pursue monetary integration, to follow a path similar to the European experience, rather than to follow alternative paths such as a parallel currency approach or a harmonized inflation targeting. That RCU could in the future be issued by the so-called ‘Asian Exchange Rate Stabilization Fund’ (AERSF). The AERSF would assure the stability of regional currencies taken as a whole vis-a-vis third currencies, and between themselves as well, and as such, pave the way for full monetary integration in Asia. Comparisons with Europe are explored and implications for European and Asian regionalism are examined.

Asian Exchange Rates during the Credit Crisis: Policies to Avoid Depreciation

A few policy recommendations become apparent to avoid depreciation relative to other regional currencies when examining intra-Asian exchange rates during the most recent credit crisis. One, avoid large fiscal deficits. Two, avoid high inflation and current account deficits in order to maintain low interest rates to avoid depreciation from the unwinding of the carry trade. Third, build large official reserves or, more importantly, build large reserves of foreign currency assets. Additional results show an unexplained depreciation of the Australian dollar and the Indian rupee and appreciation of the Thai baht as the TED spread widened and credit crisis worsened.

Assessing co-ordinated Asian exchange rate regimes: Proposal for a possible move towards a common currency

This study assesses prospective Asian exchange rate regimes and finds short- and long-run currency dynamics more conducive to the introduction of a common peg based on a basket of the European euro, the United States dollar and the Japanese yen than the alternative of a United States dollar peg exchange rate regime. Exchange rate systems of 3- 4- and 5-Asian currencies are considered and the dynamics in a set of four European currencies prior to the introduction of the Euro provides benchmark evidence. The evidence for an Asian basket peg exchange rate regime is strengthened when, unlike prior studies, estimates of the long-run parameters account for time-varying volatility effects.

The Museum of Game Balls

The Museum of Game Balls Barry Lopez (bio) On the afternoon of March 17, 1997, a small DHL express package from Savannah, Georgia, arrives at the estate of Patma Loomalatma Quirquawaddis—if you're a guest there, he prefers that you call him Patti—a few miles north of Yangon, Myanmar. The estate grounds comprise fourteen hectares of landscaped lawns and formal gardens and include about a dozen outbuildings in addition to the two-story, Tudor-style manse. The property is almost entirely surrounded by rice fields, and in 1993 Mr. Quirquawaddis made it his principal residence. The package has come from Yangon by pedicab. A member of the house hold staff, I could see, received it and signed for it. He comes into the room where I am seated right away, to alert Mr. Quirquawaddis. It seems from my host's reaction that the arrival of the package is something he has been anticipating, but he gestures the servant away and continues our conversation. As we greeted each other that afternoon, Mr. Quirquawaddis informed me, politely but directly, just to be clear, that he does not share details of his business dealings or investment strategies with anyone. I took this to mean that he assumed I knew of his reputation as an analyst of stocks and bonds trading on the Asian exchanges, but that this would form no part of our conversation. Mr. Quirquawaddis—lean, short, barely five feet tall—was born in 1910 but is still quite agile. An incongruous haircut, a roached crest, gives his ferretlike movements a slight edge of menace. In conversation he is quick to make a disruptive inquiry or a pointed observation. The spacious room in which my host apparently receives all his visitors is furnished with uncomfortable Louis the Fourteenth chairs, rigid chaise lounges upholstered in brocade, and gilt-and-lacquered tables bearing porcelain vases filled with cut flowers. The walls are hung with large tapestries and paintings in the same seventeenth-century style. Mr. Quirquawaddis seems ironically amused by what appear to me to be these pretensions of his to Western noblesse, or perhaps it is how uncertain the decor has made me feel that amuses him. "What is your race?" he had inquired bluntly, almost immediately, but with a bland smile. My grandparents, I answered, were Basque on my [End Page 97] mother's side, Nigerian on my father's. My parents were both born in Portau-Prince, during the First World War. I was born shortly after the Second World War, in a small town in Connecticut—Danbury, I said. This all seemed to please him. My long-time professional interest in Mr. Quirquawaddis had been renewed by an article I had read recently in Architectural Digest. In describing my host's distinguished estate, the writer had referred to Mr. Quirquawaddis' obsession with balls of various sorts, especially those used in sporting activities. The largest of the estate's outbuildings, in fact, had been built primarily to house and display this collection, though it also included, the article said, a small stage fronted by theater seating for guests to observe plays, performance art, and choreography, some of which, according to the story, Mr. Quirquawaddis had himself written or designed. When I contacted the writer of the article, he suggested I take my inquiry about the collection to a Mr. Bao-Ding, who was its curator. In response to my note, Mr. Bao-Ding sent me an annotated list of Mr. Quirquawaddis' holdings. Among the 641 items actually on display—that is, not including items kept in storage—were cricket balls, volleyballs, American and European footballs, golf balls, medicine balls, tetherballs, and balls from scores of games I'd never heard of. They appeared to be variations on croquet, on bocce, on polo, the last of these games played by riders on different breeds of domestic animals—all, I presumed, less tractable than horses. I have no real familiarity with sports, but I marveled at the list. Desali, a kind of Uygar rugby, was played with a ball so small that a participant could hide it in his clothing. Xchutel, a Uruguayan style of billiards, was played on a surface...

MANAGING EXCHANGE RATE VOLATILITY: A COMPARATIVE COUNTERFACTUAL ANALYSIS OF SINGAPORE, 1994–2003

This paper looks at how Singapore's exchange rate regime has coped with exchange rate volatility, by comparing the performance of Singapore's actual regime in minimizing the volatility of the nominal effective exchange rate (NEER) and the bilateral rate against the US dollar with some counterfactual regimes and the corresponding performance of eight other East Asian countries. In contrast to previous counterfactual exercises, we apply a more disaggregated methodology for the trade weights, a larger number of trade partners and ARCH/GARCH techniques to capture the time-varying characteristics of volatility. Our findings confirm that Singapore's managed floating exchange rate system has delivered relatively low currency volatility. Although there are gains in volatility reduction for all countries in the sample from the adoption of either a unilateral or a common basket peg, particularly post-Asian crisis, these gains are relatively low for Singapore, largely because of low actual volatility. There are additional gains for non-dollar peggers from stabilizing intra-east Asian exchange rates against the dollar if they were to adopt a basket peg, especially post-crisis, but the gains for Singapore are again relatively modest. Finally, the conclusion from previous counterfactual studies that there is little difference between a unilateral basket peg and a common basket peg in terms of stability reduction is confirmed.

Long‐term Dependence in Asian Foreign Exchange Markets

We investigate the long‐term dependency behavior of Asian foreign exchange markets by using rescaled range analysis. Emerging markets in Korea, Taiwan, India, and Thailand, show evidences of long memory in the exchange rate return series, while the exchange rate return persistence is not found in more developed and mature markets in Japan, Australia, Hong Kong, and Singapore. Our results suggest that the return‐generating processes and presence of long memory depends on the degree of market development. In addition, the findings suggest that Asian financial crisis affects long‐term dependences of Korean won and Thai baht in which their economies and currency were hard hit by the crisis.

Day-of-the-Week Variation and Predicting Stock Returns: Taiwan and Thailand Stock Exchanges

Previously, researchers created a day-of-the-week anomaly in closing stock returns for firms listed on established financial markets. This article explores whether this line of argument is or is not satisfactory and does or does not aid in predicting daily stock returns. The article focuses on the performance of stock returns for two large Asian Stock Market exchanges, Taiwan and Thailand. The purpose is to determine if stock market returns (which include closing prices and dividends) are in part predictable and whether there are explanations for short-term predictability.

A tale of Asian exchange rate management: Romance of the three currencies

Asian currencies lack regional policy coordination and are therefore subject to volatilities such as the Asian currency crisis of 1997/99. As the Asian currencies have already been observed to be ‘flying-in-unison’, a stable exchange rate arrangement can be helpful as the next step of evolution for regional financial stability. We consider that creating a cluster effect from coordinated efforts/policies of policy-makers can lead to regional exchange rate stability. To demonstrate this cluster effect, a three-party-game is computed for an Asian bloc, viz-á-viz US dollar and the Euro, based on a Nash and a cooperative equilibrium. The cluster effect would generate external and internal pressures that work towards the formation of a regional currency, although the exact form of exchange rate regime would have to await political consensus. There are substantial welfare gains within Asia network economy through currency cooperation. The formation of an Asian currency bloc would also create counter-balance to the current dominance of the US dollar and the Euro. Like the epic story of Three Kingdoms who sought hegemony in Chinese history, the Asian currency bloc will contend with many possible outcomes of competition as well as cooperation.

Commonality in Liquidity: A Global Perspective

AbstractWe conduct a comprehensive study of commonality in liquidity using intraday spread and depth data from 47 stock exchanges. We find that firm-level changes in liquidity are significantly influenced by exchange-level changes across most of the world’s stock exchanges. Emerging Asian exchanges have exceptionally strong commonality, while those of Latin America exhibit little if any commonality. After documenting the pervasive role of commonality within individual exchanges, we examine commonality across exchanges. We find evidence of a distinct, global component in bid-ask spreads and depths. Local (exchange-level) sources of commonality represent roughly 39% of the firm’s total commonality in liquidity, while global sources contribute an additional 19%. We also investigate potential sources of exchange-level and global commonality. We show that commonality is driven by both domestic and U.S. macroeconomic announcements.

An Examination into Rationality and Operational Efficiency of Exchange Mergers

Unlike a merger of for-profit businesses, the intra- and inter-business mergers of exchanges have their uniqueness in that exchanges merge to provide financial stability to the industry in which they belong, to diversify their product lines, to initiate a pre-emptive measure for better trading technologies, and to obey their government's implicit edicts for greater financial and operational efficiency. Because three Asian exchanges were forced to merge under their respective government's edicts, this paper analyzes the presence of an operational efficiency gain after a forced merger. The equality-of-the-means tests on the number of firms listed, trading volume, turnover rate, and market capitalization showed efficiency was gained after the forced merger. This conclusion shows that a forced merger may not be necessarily bad to the merged exchanges and may provide a new motive and rational for a merger of exchanges in the future.

Purchasing power parity in Asian economies: further evidence from rank tests for cointegration

The finding of nonlinear cointegration between Asian exchange rates with the corresponding relative prices and aggregate price levels based on Breitung's (2001) nonparametric rank tests reinforces previous validations of purchasing power parity (PPP) by the parametric testing procedures. Hence, the long-run Asian exchange rates are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis.

Revisiting East Asian exchange rates: the same spirit under a different sky

The transmission of shocks among East Asian currencies following the 1997 crisis has been a widely investigated topic using different methodologies. Some studies have utilized linear vector autoregression (VAR) and its tools, such as impulse responses and forecast error variance decompositions. A few on the other hand, focusing on the nonlinearities in exchange rates, employed Markov-switching VAR (MS-VAR) framework, thus attempted to capture asymmetries linked with different regimes. A major problem of typical MS-VAR models, however, lies in the lack of economic intuition unless these are converted into a structurally identifiable form. This article extends such studies by using a different apparatus: first, it combines Markov switching and structural identifying restrictions in a vector autoregression (MS-VAR) framework, thus providing regime-dependent impulse response functions to currency shocks. Second, it also provides impulse responses to shocks associated with regime changes. Empirical findings sh...

Asymmetric cointegration relationship among Asian exchange rates

This study investigates the asymmetric cointegration relationship among the Japanese yen, the Korean won, and the Singapore dollar using an instrumental variable threshold cointegration test which allows asymmetric adjustment and avoids test statistics depending on nuisance parameters. This threshold cointegration approach clearly provides evidence for a cointegration relationship characterized by asymmetric adjustment toward the long-term equilibrium level. This finding indicates that the long-term equilibrium relationship among the Japanese yen, the Korean won and the Singapore dollar remains stable with asymmetric adjustment. The finding also shows there is a temporal delay in the reaction of the Korean won and the Singapore dollar to the Japanese yen change. Therefore, we conclude that, in the short-term, Korean won and Singapore dollar shocks are important to determine the response of the Japanese yen; the Singapore dollar shock is also important to determine the response of the Korean won; however, the Japanese yen shock is unimportant to determine the responses of the Singapore dollar and Korean won.

TOWARD A REGIONAL EXCHANGE RATE REGIME IN EAST ASIA

Abstract. Deepening market‐driven economic integration in East Asia makes intraregional exchange rate across the region increasingly desirable and necessary. The paper suggests that East Asia's emerging economies begin to choose a currency basket as a monetary policy anchor to enable all East Asian currencies to collectively appreciate vis‐à‐vis the US dollar, while maintaining intraregional rate stability, in the event of surges of capital inflows or a rapid unwinding of global payments imbalances. Following this initial step, East Asia may agree on more rigid intraregional exchange rate stabilization schemes through, for example, an Asian Snake or an Asian Exchange Rate Mechanism.

REVALUATION PRESSURE AND NEW EXCHANGE RATE ARRANGEMENTS FOR EAST ASIA: A SYMPOSIUM

Abstract. This symposium offers a selection of significant research on the renminbi and broader East Asian exchange rate policy pressures and options first presented at a 22–27 May 2006 conference in Bellagio, Italy. Its venue, Villa Serbelloni, was made available by the Rockefeller Foundation. Reforms of the international monetary and financial system have been discussed there since the 1960s. As was the case then, the focus of the conference was once again on the declining international anchor functions and relations with the US dollar, but this time in and with continental East Asia, rather than Europe and Japan.

The Effect of a Collective Exchange Rate Adjustment on East Asian Exports

This paper estimates long-run effects of a collective exchange rate adjustment on multilateral exports from China, Japan, South Korea, and Taiwan. The findings show that a 1 percent generalized appreciation of all East Asian exchange rates would reduce East Asian exports by about 3 percent.

An Empirical Examination of East Asia´ s Pre-Crisis Pegged Exchange Rates

I. Introduction According to conventional wisdom, the rigidity of pre-1997 pegged exchange rate regimes in East Asia was one of the main causes of the currency crisis. (1) The basis for assuming that East Asia's pre-crisis exchange rates were rigid is the declarations of central banks about exchange rate policies. In practice, however, the declared exchange rate regime itself may not indicate rigidities--a tightly controlled managed float regime may be more rigid than a pegged regime with a wide band, ceteris paribus. As Ghosh et al. (1995) and Reinhart (2000) point out, declared exchange rate regimes may differ from the actual characteristics of exchange rates. Therefore, it is worthwhile to pursue a statistical examination of East Asia's pre-crisis exchange rates in order to identify their distinctive characteristics. We also investigate the issue of whether systematic relationships existed among East Asia's bilateral exchange rates vis-a-vis the U.S. dollar in the pre-crisis period. For example, was there a systematic relationship between the Malaysian ringgit-U.S, dollar exchange rates and the Thai baht-U.S, dollar exchange rate? The existence of such systematic relationships in the pre-crisis period would lend further support to the contagious nature of the Asian currency crisis. At the same time, the pre-crisis existence of relationships raises the interesting question of how the peg regimes were able to last so long in light of their vulnerability to external shocks. Evidence shows that intra-day, daily, or weekly exchange rates are approximated by martingales, and the returns exhibit conditional volatility, fat-tail distribution, skewness, and excess kurtosis. Autoregressive conditional heteroscedasticity (ARCH) models have been used successfully to describe foreign exchange rate data. More recently, Engle and Gau (1997) examine the conditional volatility of the exchange rates under the target zone regime of the European Monetary System (EMS). They find that exchange rates within the EMS show the same characteristics as free-floating exchange rates except for strong negative autocorrelations. Conditional volatility in exchange rates has been attributed to the irregular arrival of new information in the market. Engle, Ito, and Lin (1990) interpret volatility persistence in foreign exchange markets to either the time it takes market traders to act on new information or the autocorrelation of news across countries arising from potential policy coordination. They employ Ito and Roley's (1987) decomposition of the intra-day yen-U.S, dollar exchange rates based on the operating times of different markets to show volatility spillover across markets. On the other hand, Baillie and Bollerslev (1990) examine systematic relationships in the conditional returns or variances of the hourly bilateral exchange rates of the United Kingdom, Germany, Switzerland, and Japan vis-a-vis the U.S. dollar. They use the robust inference procedures of Wooldridge (1990) and Bollerslev and Wooldridge (1992) in order to handle the skewness and excessive kurtosis in the data. The results fail to show systematic relationships among the four major exchange rates. Our paper investigates the behaviour of the precrisis daily bilateral exchange rates of four Newly Industrializing Countries (NICs) of Hong Kong, South Korea, Singapore, and Taiwan, and four members of the Association of Southeast Asian Nations (ASEAN-4), Indonesia, Malaysia, Philippines, and Thailand, vis-a-vis the U.S. dollar. We perform preliminary analyses and robust misspecification tests to explore the distinctive characteristics of East Asian exchange rates. We also look for empirical evidence of systematic relationships among the region's precrisis bilateral exchange rates vis-a-vis the U.S. dollar. Although our paper is essentially a study of the behaviour of exchange rate rather than exchange rate policy or regime, we do attempt to draw some policy implications from our results. …

Can the traditional Asian US dollar peg exchange rate regime be extended to include the Japanese yen?

Using daily data for a select set of four Asian exchange rates, namely the Hong Kong dollar, the Singapore dollar, the Taiwan dollar and the Thailand baht, from October 1985 to October 2002, we apply principal components analysis and the O-GARCH model to describe the evolution and persistence in the correlations over time. We also estimate 2-, 3- and 4-variable multivariate GARCH models, without imposing the assumption of constant correlations, to investigate volatility interaction amongst the currencies. To allow for fat tails in the distributions of exchange rate changes, we use the multivariate student- t distribution in maximising our log-likelihood functions. Our results indicate the possibility of designing an Asian exchange rate system involving a number of the region's currencies.

East Asian Real Exchange Rates and PPP: New Evidence from Panel-data Tests

This paper empirically tests purchasing power parity (PPP) using panel unit root designed for heterogeneous panels. Monthly data of six East Asian countries (South Korea, Thailand, Indonesia, Malaysia, Singapore and the Philippines) were used to test the long-run PPP relationship. This study documents the fact that unlike the pre-crises period, mean reversion in real Asian exchange rates is a feature of the post-crises period in all six countries considered in this study. It turns out that the results found in this study based on an array of panel unit root tests appears to be invariant to the choice of the numeraire currency, namely the US and Japanese yen.

Prospects for enhanced exchange rate cooperation in East Asia: some preliminary findings from generalized PPP theory1

The Asian financial crisis increased economic disparities in the East Asian (EA) region, thus making monetary integration more difficult, but rekindled political interest in Asian monetary and exchange rate cooperation. This article applies the theory of Generalized Purchasing Power Parity (G-PPP), which looks at the behaviour of long-run real exchange rates, to assess the potential for an optimum currency area (OCA) among a subset of EA countries based on five of the more advanced members of the Association of Southeast Asian Nations (ASEAN5). Our findings suggest little support for an OCA for ASEAN5 as a bloc prior to the Asian financial crisis and mixed results in the post-crisis period. In particular, asymmetries in the way countries adjust to shocks and low or insignificant speeds of adjustment were found. Thus, although the application of single OCA criteria is notoriously demanding and our tests apply to only one of the many criteria for the successful formation of an OCA, we cannot find persuasive evidence that ASEAN5 as a group constitute a potential currency area with either the USA or Japan, even when the ‘noisy’ period of the Asian financial crisis is omitted. 1 A first draft of this article was presented at the Western Economic Association International Pacific Rim Conference, Taipei in January 2003. We would also like to thank the Staff of the Regional Economic Monitoring Unit (REMU) at the Asian Development Bank (ADB) in Manila for their helpful comments on an earlier draft.