wang-strategic games in asian financial crises

8/17/2019 Wang-Strategic Games in Asian Financial Crises

1/19

Strategic Games in Asian Financial

Crises: the Case of Hong Kong Presented by Hui Wang

Paper prepared by Heping Pan, Shan Wu, Honglei Zhang , Jiaqing Dai, Hui Wang

Chinese Institute of Intelligent FinancePrediction Research CentreUniversity of Electronic Science & Technology of ChinaPhone: +86-28-83208708/83202290

Fax: +86-28-83207216Email: [email protected]

URL: http://www.mgmt.uestc.edu.cn/prc


2/19

Contents:

1.

Introduction – from Economic Finance and BehavioralFinance to Strategic Finance

2.

Asian Financial Crisis: the Case of Hong Kong

3.

An Incomplete-Information Zero-Sum Game

of Three Camps – Speculators, Government, and Masses

4. Hang Seng Index as the Battlefield

5. Scenario Tree Analysis of Strategic Game

6. Conclusions

www.swingtum.com [email protected] 2


3/19

1. Introduction

Economic Finance

Behavioral

Finance

Strategic

Finance


4/19


2. Asian Financial Crisis ! July 2 - Thailand announces a managed float of the baht. The

Philippines intervenes to defend its peso.

! July 24 - Asian currencies fall dramatically. The Malaysian ringgitwas attacked by speculators.

! Aug 13-14 - The Indonesian rupiah comes under severe

pressure.

! Oct 20-23 - The Hong Kong dollar comes under speculative

attack; The Hong Kong stock market drops.

! Oct 28 - The value of the Korean won drops as investors sell

Korean stocks.

! Nov 3-24 - Japanese brokerage firm, largest securities firm(Yamaichi Securities), and 10 largest bank (Hokkaido Takushoku) collapse.


5/19

The Case of Hong Kong• In 1997, Asian miracle turned to be a disaster. Since Thailand

decided to float its currency baht in July, it sent other Asiancurrencies under attacking.

• Hong Kong was not immune to the regional nightmare. The firstattack on the Hong Kong dollar began on October 23, 1997. Asthe crisis in Asia developed into a worse situation, the impact onHong Kong deepened. Hong Kong's stock market dropped

significantly as speculators started three more attacks in 1998.

• Faced with the worsening economy, on 14 August, 1998 theGovernment changed from being a passive regulator to anactive market participant by accumulating large positions in localblue chip stocks, and hostilities ended with the closing of the

August Hang Seng Index futures contract.

• In 1999, the Government started selling those shares bylaunching the Tracker fund of Hong Kong making a profit ofabout HK$30 billion (US$4 billion).



6/19

3. An Incomplete-Information Zero-Sum

Game of Three Camps

Three Camps: International strategic speculators (S)

Domestic government agencies (G)

Herding masses (M)

An Incomplete-Information Zero-Sum Game:


S G

M

Incomplete-Information Game:

In this game, the three camps, or at least some of themmay lack full information about the other camps’ (or eventheir own) payoff functions, about the physical or the socialresources or about the strategies available to others (oreven to them), or about the amount of information theothers have about various aspects of the game, and so on.Zero-Sum Game:

Zero-sum describes a situation in which a participant's gain

or loss is exactly balanced by the losses or gains of theother participants. If the total gains of the participants areadded up, and the total losses are subtracted, they will sumto zero. Here, the loss and gain of S is equal to the gain orloss of G and M.


7/19


A Major Strategy of Speculators

“东” One of Thirty-Six Stratagems

Making a feint to the eastand attacking in the west

Attacking HKD as a catalyst trigger to prick the bubble

HKD Interest

rates HSI

Short HSIfutures


8/19


Major Strategy of Government

First Stage

HKD

Raise interest rates

Maintain the peg

system

HSI

Passive

reaction

Second Stage

S and M short HSI

and HSI futures

Buy index shares

Proactive

reaction

Pull HSI up 1169 points,

an increase of 17.55%,and raise HSI futures.


9/19


Objectives:S: To obtain profits from short selling stock index futuresG: To defend its currency, equalize interest rates to break the speculative

cycle and remove incentives of speculators.

Constraints:

S: Risk controlLimited capital Affected by herding behavior

G: Worries about damages to its image and reputation as the freesteconomy

Objectives, Constraints and Capabilities


10/19


Capabilities:

G: More than 860 billion US dollars foreign exchange reserves,the third largest in the world.World’s perfect financial regulatory systemHealthy economyGreat confidence in HK dollarChinese government as a strong backup

S: Attacks on Hong Kong’s peg systemLarge flow of hot money (short-term bank deposits and short-termsecurities with good liquidity)Promotion of market herding effect, attracting large number ofinvestment funds to follow


11/19

Speculators

Objective:

S. T.

R is profit. A is wealth. C is capital. t is the time scale. MV is the value of HKD. FV is

the value of HSI futures. is the quantity of HKD and HSI futures. P is the price of

HKD and HSI futures. f is the cost ratio. is the exchange rate. N is the profit of one

pip. HSIF is the price of HSI futures. HSI is the price of HSI stocks.


12/19

Government

Objective:

S. T.


13/19

4. Hang Seng Index as the Battlefield



14/19



15/19


97.7 S took short

positions on the HK$

and Hang Seng IndexFutures.

97.10.23 S short the HK$

and Hang Seng IndexFutures.

98.6.12 S took short


and Hang Seng Index

Futures.

G bought HK$

and raised interest

rates.

G bought HK$

and raised interest

rates.

The linked exchange

rate maintained. HSIfell.

The linked exchange


5. Scenario Tree Analysis of Strategic Game

98.8.5 S took short


and Hang Seng

Index Futures.

G actively bought

HK$ and raised

interest rates.

The linked exchange



16/19



positions on the HK$and Hang Seng

Index Futures.

G used exchange

fund and landfund to buy blue-

chip shares of the

HSI and to raise

the index futures.

98.8.24 G used 50billion HK dollars

to intervene in the

market.

G intervened in

the market andraised the

September

index futures.

HSI redounded 560

points and closed at

7224 points. HSI surged 317 points

and closed at 7845

points. The linked exchange

rate maintained. HSI

rose.

98.8.25 S closed the

August HSIF andshort sell the

September HSIF



and Hang Seng Index

Futures.

G bought HK$and put it back to

the banking

system to maintain

interest rates.

The linked exchange

rate maintained. HSI

fell.


17/19


98.8.27 G spent

200 billion HKdollars.

G still intervened in

the market, and

pulled HSI up 1169

points, an increase

of 17.55%.

98.9.5 G unveiled

seven new

monetary

measures to

strengthen the pegsystem and to ease

extreme volatility

of interbank rates.

HSI closed at 7922

points and rose 88points.

HSI finally closed at

7829 points, and HSIFsettled at 7851 points.

98.8.28 S sold off

blue chips and large

European fund

entered the market.

98.8.26 G activelyshort HSIF, andspeculators followed

the trend.

S took short

positions on the HK$and Hang Seng

Index Futures.

HSI plunged 160

points and then wentback to its original

level.


18/19

6. Conclusions • Hong Kong provides the first case of its kind in the history of

modern financial markets in the sense that it was the first time

an explicit strategic game was played speculators, governmentagencies and masses.

• The complexity of this strategic game is so overwhelming thatwe must combine game-theoretical reasoning, macroeconomicanalysis and behavioural dynamics of financial markets in aretrospective analysis.

• The game-theoretical analysis starts with a clarification of theinitial situations of the major players and their objectives,capabilities and constraints. It then proceeds to generatingmulti-stage game scenario trees. Wins or losses of each camp ateach stage are evaluated, and consequences and lessons are

discussed.• This research reminds us that strategic finance may emerge as

a new level of understanding on top of economic finance andbehavioural finance.



19/19


Thanks for your attention!

wang-strategic games in asian financial crises

Documents