How does Hong Kong Monetary Authority use statistics in financial market surveillance? by Tom Fong. Market Research Division Research Department

Transcription

1 How does Hong Kong Monetary Authority use statistics in financial market surveillance? by Tom Fong Market Research Division Research Department The views expressed in this presentation do not necessarily represent those of the Hong Kong Monetary Authority.

2 Agenda What does the HKMA do? Hot topic: What is happening after US tightens its monetary policy? Will Hong Kong banks remain resilient? Macro stress tests Will Hong Kong dollar remain credible? Linked exchange rate system How would emerging markets be affected? A study of financial contagion Q&A 2

3 1 April 1993 Exchange Fund Office Banking Commissioner Office Hong Kong Monetary Authority

4 Main functions of the HKMA Which functions are correct? 1. maintaining currency stability within the framework of the Linked Exchange Rate system 2. promoting the stability and integrity of the financial system, including the banking system 3. developing competitive, efficient, fair, orderly and transparent securities and futures markets 4. helping to maintain Hong Kong's status as an international financial centre, including the maintenance and development of Hong Kong's financial infrastructure 5. encouraging the development of the retirement scheme industry in Hong Kong 6. managing the Exchange Fund 4

5 Main functions of the HKMA Which functions are correct? maintaining currency stability within the framework of the Linked Exchange Rate system promoting the stability and integrity of the financial system, including the banking system X developing competitive, efficient, fair, orderly and transparent securities and futures markets helping to maintain Hong Kong's status as an international financial centre, including the maintenance and development of Hong Kong's financial infrastructure X encouraging the development of the retirement scheme industry in Hong Kong managing the Exchange Fund 5

6 Exchange Fund assets 6

7 Investment return of the Exchange Fund 7

8 Banking stability 8

9 International financial centre Basel Committee on Banking Supervision RMB Business in HK 9

10 Infrustructure 10

11 Financial markets Money markets Short term debt financing and investment Foreign exchange markets Derivatives Futures and options Capital markets Stocks and bonds 11

12 What will happen in the HK money market when US interest rates rise? Aug/1992 Feb/1993 Aug/1993 Feb/1994 Aug/1994 Feb/1995 Aug/1995 Feb/1996 Aug/1996 Feb/1997 Aug/1997 Feb/1998 Aug/1998 Feb/1999 Aug/1999 Feb/2000 Aug/2000 Feb/2001 Aug/2001 Feb/2002 Aug/2002 Feb/2003 Aug/2003 Feb/2004 Aug/2004 Feb/2005 Aug/2005 Feb/2006 Aug/2006 Feb/2007 Aug/2007 Feb/2008 Aug/2008 Feb/2009 Aug/2009 Feb/2010 Aug/2010 Feb/2011 Aug/2011 Feb/2012 Aug/2012 Feb/2013 Aug/2013 Feb/2014 Aug/2014 Feb/2015 Aug/2015 % month HIBOR 3-month LIBOR 12

13 Who will suffer from interest rate rises? 13

14 What will happen to banks when interest rates increase? %pa A1 C1 A2 Area X C2 Area Y B1 Time BLR HIBOR B2 A B C Easing Phase Tightening Phase US Interest Rate Cycle 14

15 Our macro stress test framework Input data Estimation of macroeconomic credit risk model Monte Carlo simulation of default rates based on combination of market situations Loss distribution of credit risks: 1.Mean 2.Value-at-risk Credit loss distribution 15

16 HK banks are always under stress Frequency Baseline Credit loss Mean 0.24 VaR at 90%CL 0.56 VaR at 95%CL 0.78 VaR at 99%CL 1.53 VaR at 99.9%CL 2.72 Stressed Credit loss Mean 1.04 VaR at 90%CL 1.93 VaR at 95%CL 2.40 VaR at 99%CL 3.57 VaR at 99.9%CL % 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Credit Loss (%) 16

17 Is HKD credible? HKD banknotes issued by the three note-issuing banks are fully backed by USD reserves fixed exchange rate HKD Banknotes HK$7.8=US$1 USD

18 Resilence against external shocks HK$/US$ Introduction of the Linked Exchange Rate system (Oct 83) Closure of BCCI (HK) (Summer 91) Mexican Crisis (Jan 95) Asian Currency Turmoil (July 97-98) 11th September 2001 Reform of RMB exchange rate regime (Jul 05) World Stock Market Crash (Oct 87) Gulf Crisis ERM (Aug 90) Turmoil (Sep 92) Announcement of the passing away of Deng (20 Feb 97) Abandonment of Argentine Currency Board system (Jan 02) Collapse of Lehman Brothers and Global Financial Crisis (Sep 08) HKD has shown a high degree of credibility

19 Convertibility zone HKD per USD Is the spot exchange rate mean-reverting? If credible, the rate will revert to the mean (=?) 19

20 A test for mean reversion Variance ratios Check whether the variance of multi-period returns decreases with time K Var( rt ) / K VR ( K) = 1 Var( r ) /1 t K where is the K-period return r t 1 = < 1 > 1 under random walk under mean reversion under mean aversion 20

21 VR tests for the HK dollar Variance Ratio White noise 1.20 Variance Ratio Day 21

22 Empirically HK dollar is meanreverting! Variance Ratio Variance Ratio (LHS) Test for VR = 1 (RHS) 10% level of significance (RHS) 5% level of significance (RHS) Standard normal distribution Day

23 More than credibility! % 5 % 5 4 Lehman bankruptcy European debt crisis Hong Kong Dollar Risk reversal of the Hong Kong dollar (vis-à-vis the US dollar) -5 23

24 Risk reversals of northeast Asian currencies (vis-à-vis the US dollar) % 15 % Lehman bankruptcy European debt crisis Japanese Yen Korean Won Renminbi

25 Volatility as yardstick of turbulence VIX: "The Investor Fear Gauge" (Whaley, 2000) % % 120 US's 911 Global stock market attack crash in the aftermath of US recession Collapse of the Bankruptcy US subprime of Lehman industry Brothers Suspension Facing 8.5bn of Greece's euros in Greek bond redemptions bailout cash Dow Jones FTSE NASDAQ NIKKEI Euro Stoxx 50 S&P DAX Hang Seng CAC 40 25

26 What is quantile? A quantile is: r ( 1) r(2)... r( n / 2)... r( n) e.g. median Median Change in spread 26

27 How large this response could be? Quantile regression is used to assess the tail risk Change Asset in spread Y Quantile regression, 50% quantile Quantile regression, 99% quantile Quantile regression, 1% quantile Asset X VIX Notes: (1) For illustrative purpose, the three quantile regression lines and the distributions are roughly sketched out in this graph. (2) The graph presents roughly a bird s eye view of the distributions.

28 HKD is a safe haven currency! 28 Indian Rupee Australian Dollar New Zealand Dollar Canadian Dollar Singapore Dollar Euro Danish Krone Norwegian Krone Swedish Krona Chinese Renminbi Pound Sterling Swiss Franc Hong Kong Dollar Gold Japanese Yen Currency Estimated coefficient at 5% quantiles

29 FX links with sovereign creditworthiness - cointegration and error corrections 29

30 Contagion among economies: Sovereign CDS spreads 1,400 1,200 1, Australia Hong Kong Japan Malaysia Singapore New Zealand China Indonesia Korea Philippines Thailand

31 Sovereign tail risk assessment A 95 th percentile of the historical distribution, is used to identify a sharp increase

32 Determinants of sovereign credit risk: at the mean vs tail Major source of risk factors Global vs domestic factors Are they equally important? Market extremity Normally, how do these factors contribute to sovereign credit risk? During market turbulent, does the contribution change? 32

33 Determinants of sovereign credit risk: at the mean vs tail QE tapering tantrum Mean risk Tail risk 33

34 What a data analyst always sees 34

35 Summary: What should you ask yourself before making a good estimation How much time / money do you have? What does the data / theory tell you? Is your model parsimonious and adequate? Is your model useful in telling the truth? 35

36 Any questions? 36