Matthew S. Yiu

Dynamic correlation analysis of financial contagion in Asian markets in global financial turmoil

This article investigates the dynamics of correlation between 11 Asian stock markets and the US stock market. By utilizing the method of ‘principal components’, we identify a single latent factor that can explain a major portion of variation in the weekly returns of these 11 markets from 1993 to early 2009. We employ the asymmetric Dynamic Conditional Correlation (DCC) model to estimate the correlation between this Asian factor and the US stock market. We find that there is a mean shift in the estimated DCC in the period from late of 2007. We refer this finding as contagion from the US to the Asian markets. However, we find no such evidence of having contagion between the US and individual markets in Asia during the Asian financial crisis.

Banking Deregulation and Macroeconomic Impact in China: A Theoretical Analysis and Implications of Wto Accession to the Mainland and Hong Kong

Since the beginning of 1990s, the credit balance of the banking system in mainland China has experienced a big swing from negative to positive. The balance has continued to expand up to now. It seems that both negative and positive credit balances are so large that the financial resources have been utilized inefficiently by the banking system. On the eve of Chinai¦s accession to the World Trade Organization (WTO), challenges from banking competition will increase. In this paper a three-sector equilibrium model of monopolistic banking competition is set up and is applied to analyze the impact of the expanding credit balances and banking reform on the Chinese economy. Through theoretical analysis, reasons for the expanding credit balance are provided and some possible solutions are given. Chinas accession to the WTO will present many challenges to the state-owned banks. Foreign banks will be allowed to compete directly with Chinese local banks. We found that competition will not only promote Chinas GDP, investment, consumption and deposits as well as bring benefits to consumers, but also provide the banking sector from Hong Kong with new opportunities.

Nowcasting Chinese GDP: Information Content of Economic and Financial Data

This paper applies the factor model proposed by Giannone, Reichlin, and Small (2005) on a large data set to nowcast (i.e. current-quarter forecast) the annual growth rate of China’s quarterly GDP. The data set contains 189 indicator series of several categories, such as prices, industrial production, fixed asset investment, external sector, money market and financial market. This paper also applies Bai and Ng’s criteria (2002) to determine the number of common factors in the factor model. The identified model generates out-of-sample nowcasts for China’s GDP with smaller mean squared forecast errors than those of the Random Walk benchmark. Moreover, using the factor model, we find that interest rate data is the single most important block in estimating current-quarter GDP in China. Other important blocks are consumer and retail prices data and fixed asset investment indicators.

Detecting Bubbles in the Hong Kong Residential Property Market: An Explosive-Pattern Approach

This study applies the newly developed bubble detection method (Phillips, Wu and Yu, 2011) to identifying asset bubbles in the Hong Kong residential property market. Our empirical results show that the method is capable of detecting the 1997 bubble and is able to reveal the corresponding origination and collapse, showing its superiority over the standard unit root and co-integration method. During the period between mid-2009 and early 2011, the method indicates strong upward price pressure in the mass segment and bubble-type behaviour in two short periods of time in the luxury segment. The results, however, show potential shortcomings of the method including: the high correlation between the price-rent differentials and t-statistics near the critical values, and the symmetric property towards explosive growth and precipitant fall of the time series.

A Currency Board Model of Hong Kong

The need for a deeper understanding of the operation of Hong Kongs currency board arrangements was highlighted during the Asian financial crisis in 1998. A model-based approach built on hypothetical stochastic simulations would be useful for this purpose. This paper develops a new procedure of implementing stochastic simulations in a currency board model for Hong Kong. Our new procedure is useful in the context of a nonlinear model with forward-looking expectations under conditions of noncertainty-equivalence, such as the model of Hong Kongs currency board. A simple target-zone model of the exchange rate is used as an example to illustrate the difference between our new simulation procedure and existing procedures in the literature. Finally, the new procedure is applied to the currency board model to investigate the stochastic properties of endogenous variables under a wide range of shocks.

House Market in Chinese Cities: Dynamic Modeling, In-Sample Fitting and Out-of-Sample Forecasting

This paper attempts to contribute in several ways. Theoretically, it proposes simple models of house price dynamics and construction dynamics, all based on forward-looking agents’ maximization problems, which may carry independent interests. Simplified version of the model implications are estimated with the data from four major cities in China. Both price and construction dynamics exhibit strong persistence in al cities. Significant heterogeneity across cities is found. Our models out-perform widely used alternatives in in-sample-fitting for all cities, although similar success only limited to highly developed cities in out-of-sample forecasting. Policy implications and future research directions are also discussed.

A Factor Analysis of Trade Integration: The Case of Asian and Oceanic Economies

We study trade integration among 15 selected Asian and Oceanic economies using factor models. The principal component approach is employed to extract the common factor that drives trade integration from bilateral trade integration series. It is found that the estimated common trade integration factor has strong seasonal and deterministic components. In accordance with theory, the common trade integration factor is significantly associated with the economic growth and the trade barriers of the 15 economies. However, we find no evidence that the common trade integration factor is affected by foreign direct investment. The basic model is extended to incorporate an ASEAN factor that affects trade integration among the ASEAN economies in our sample.

Unobservable-Components Estimates of Output Gaps in Five Asian Economies

This paper estimates output gaps for Hong Kong, Korea, the Philippines, Singapore and Taiwan, employing the HP filter and unobservable-components (UC) techniques. The latter approach assumes that actual output is the sum of potential output, which follows a random walk with a time-varying drift, and a stationary output gap. While the results imply that UC methods are useful in estimating output gaps in Asia, simple Phillips curves suggest that the information contents of the two measures of the gap are essentially identical. The main advantage of the UC technique is that it allows the construction of confidence bands for the gap.

The Effect of Capital Flow Management Measures in Five Asian Economies on the Foreign Exchange Market

This paper examines the effects of the capital flow management measures (CFMs) introduced by five Asian economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) to deal with large capital inflows on the foreign exchange market. Using the GARCH methodology, this paper models the changes in these economiesi¦ exchange rates against the US dollar with the eight CFMs from February 2010 to March 2011 as the focal explanatory variable. The empirical results show that four CFMs stabilised the exchange rates by reducing exchange rate volatility and one had an effect on the exchange rate level. However, their effects on the currency option market were mixed.

Effects of capital flow on the equity and housing markets in Hong Kong

The revival of strong capital flows to emerging economies in the aftermath of the Global Financial Crisis in 2008-09 has rekindled the debate on the adverse effects of excessive capital inflows. We study the effects of official and illicit capital flows on Hong Kong, which is a small and open economy with minimal restrictions on cross-border fund movements. To illustrate the effects of different types of capital flows, we study official and illicit flows on Hong Kongi¯s equity and residential housing markets. It is found that the official and illicit capital flow measures reflect different facets of flow movements and exhibit differential effects on the equity and residential housing markets. The results highlight the complexity of managing capital flows, and the relevance of policies targeting specific sectors.