The Evolutionary Synchronization of Exchange

Rates System in ASEAN+6

Xiaobing Feng Haibo Hu

Xiaofan Wangfxb@sjtu.edu.cn

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.