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Exchange Market Pressure and Degree of Intervention
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Prof. Dr. Saadiah Mohamad
Khalilah Zaghlol
Institute of Business Excellence
Faculty of Business Management
Universiti Teknologi MARA,
Shah Alam, MALAYSIA
37th FAEA @ Philippine International
Convention Center, Manila
28-29th November 2012
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Content
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Objective
Background
Problem & Motivation
Rationale
Literature Review
Methodology
Empirical Findings
Conclusion
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Objective
 To investigate into the exchange market
behavior – Malaysia as a case study
 To measure the degree of EMP
 To look into the degree of intervention
 To analyse the role of EMP & official forex
intervention
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Motivation & Problem
 Activist approach to intervention supposedly
has terminated, but the truth it that it has not
ended …
 Is yen intervention on the horizon?
 The most recent world wide financial crisis
that emerged in late ‘07 and reached its
climax btw Aug ‘08 & Feb ’09
 Although it started with the subprime
mortgage related crisis – it led to global
liquidity crisis
 Implications of QEs by the U.S. & the Fed &
the easing policies in the Euro countries
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Rationale
 The importance of EMP
 EMP can cover all spectrum of exchange rate
regimes
 EMP can integrate both theories: ER & BOP
 EMP can be more relevant than just ER changes as
a determinant of other phenomena
 EMP better signals forex tensions
 EMP also helps speculators to find profit
opportunities
 EMP can help policymakers to timely counteract
contagion from other nations
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Background
 FOREX is the world’s largest market
 Daily average trading volume: NYSE = USD16
bn; LSE = USD11 bn
 Average daily turnover in global FOREX: Apr
2010 = USD3.98 tn; Apr 2007 = USD3.21 tn
 We are basically measuring the external
position by looking at changes in EMP
 QE1, QE2 & QE3 – supply glut/flow of capital
into the emerging economies (EMs) like
Malaysia
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Literature Review
 Seminal paper of Girton & Roper (1977)
 Connolly and De Silveira, 1979; Hodgson and
Schneck; 1981; Roper and Turnovsky, 1980;
Burdekin and Burkett, 1990; and Pentescost,
Van Hooydonk and Van Poeck, 2001
 In developing countries: Brazilian dataset by
Connolly and De Silveira, 1979; Modeste
(1981) to Argentinian data; an empirical study
on Korean data by Kim (1985); Thornton
(1995) to Costa Rican database; Pontines and
Siregar (2006) to Singaporean data; and
Feridun (2009) to Turkish dataset
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Literature Review
 More recent studies:
 by
Aizenman and Hutchinson (2010) – a
careful review on the impact of the
unprecendented global crisis in 2007-2009
on EMP
and
 Bordo, Humpage, and Schwartz (April 2012)
– an epiloque of forex operations in the 21st
century
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EMP index
 EMP is in fact counterfactual
 Definition:
 Usage: a general measure of tensions on
FOREX market
 Also primarily utilized as a market pressure
indicator which is most widely adopted to
signal the susceptability/break up of a crisis
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Data
 Data Sample: Malaysia (domestic country) &
USA (anchor country)
 Data Span: January 1976 – February 2011
 35 years, monthly frequency
 Sources of data: IMF’s IFS, World Bank’s WDI
 Variables: nominal ERs, interest rates and
foreign exchange reserves
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Methodology
 EMP index
 Eichengreen, Rose, and Wyplosz (1995, 1996)
 Model-independent
 EMP Formula: 3 components
 The sum of the % chg in the exchange rate
(+ve denote % depreciation), % loss of
reserves and interest rates
 High values denote greater external pressure
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Methodology
 EMP
index: Augmented formula by
Eichengreen, Rose, and Wyplosz (1995,1996)
where:
 e = exchange rates
 r = foreign exchange reserves
 i = interest rates
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Empirical Findings
 The ERW-EMP is further expressed as follows:
 An increase shows higher tensions on the
currency
 For
the
approach
weights:
Volatility-smoothing
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EMP
 The EMP index is used as a general measure
of tensions on the foreign exchange market
and country’s susceptibility to crisis
 As
an
indicator
for
pressure/speculative pressure
market
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Results
 EMP index for Malaysia (1976-2011)
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Results/ Findings
 Pre-crisis 1997 period: > tranquil in 1980s –
1996
 mid May & July 1997: 2 major speculative
attacks on MYR
 Highly volatile EMP during crisis period – large
depreciation of MYR, interest rate to 40%,
12% of reserves spent
 2007-2009: global crisis but EMP rather muted
as compared to 1997
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Conclusion
 Imperative to monitor movements of EMP for not
just policy makers
 EMP an important tool for an economy
 EMP can be more relevant than just ER changes as
a determinant of other phenomena
 EMP better signals forex tensions
 EMP also helps speculators to find profit
opportunities
 EMP can help policymakers to timely counteract
contagion from other nations
 Fast fact: a WIP hence appreciates feedback!
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End of Presentation
Thank You
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