The Evolutionary Synchronization of Exchange Rates System in ASEAN+6

1. The Evolutionary Synchronization of Exchange Rates System in ASEAN+6 Xiaobing Feng Haibo Hu Xiaofan Wang fxb@sjtu.edu.cn

2. Motivation • Formulating a single currency in East Asia is desirable but challenging

3. Reasons • Lack of political commitments in the region, • Diversity of exchange rate regimes • Makes it hard to coordinate among nations

5. 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?

6. 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.

7. Two Questions • Do they still stick to the “Asian Dollar Standard” or they will adopt a different regime like China?

8. Two Questions • If they decide to reduce the correlation with the US Dollar, do they act independently or they will take coordinated collective action?

9. Methodology • Random matrix theory • Correlation Matrix • Cross Sample Entropy,Cross Entropy

10. Stationary Tests

12. Transformed to be stationary

15. Cross Sample Entropy

16. 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,

17. Analytic Representation

19. RMT

20. Figure 1 Eigenvalue Density before Reform 1.4 1.2 1 Probability 0.8 0.6 0.4 0.2 0 0 1 2 3 4 5 6 Eigenvalue

21. Figure 2. Number of Eigenvalues outsied Random Prediction before Reform 6 5 Before Reform 4 3 2 Random 1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

22. Figure 3.Eigenvalue Density After Reform 0.8 0.7 0.6 0.5 Probability 0.4 0.3 0.2 0.1 0 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Eigenvalue

23. Figure 4. Number of Eigenvalues outside Random Prediction after Reform 4.5 4 3.5 After Reform 3 2.5 2 1.5 Random 1 0.5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

24. 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.

25. 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.

26. Conclusion • The interaction among Asian currencies has been intensified; • The dependence upon US Dollar has been weakened.