The Impact of the Japanese Banking Crisis on the Intraday FX Market

Using the tick-by-tick yen/dollar exchange rate, this paper examines the effect of Japanese banking crisis in late 1997 on the foreign exchange market. By high-frequency methodology, GARCH estimation and variance-ratio tests, the existence of a structural break in the foreign exchange market at the onset of the crisis is detected. We show a reversed pattern in return volatility after the series of bankruptcies. From the microstructure analysis, it is found that the change in exchange rate dynamics can be attributed to a change in strategic foreign exchange trade behavior. The result provides new insights into the trading activities of market makers at the onset of bank failuresIntraday exchange rate, Banking crisis, GARCH, microstructure

Intra-Day Seasonality in Activities of the Foreign Exchange Markets: Evidence From the Electronic Broking System

This paper examines intra-day patterns of the exchange rate behavior, using the %u201Cfirm%u201D bid-ask quotes and transactions of USD-JPY and Euro-USD recorded in the electronic broking system of the spot foreign exchange markets. The U-shape of intra-day activities (deals and price changes) and return volatility is confirmed for Tokyo and London participants, but not for New York participants. Activities and volatility do not increase toward the end of business hours in the New York market, even on Fridays (ahead of weekend hours of non-trading). It is found that there exists a high positive correlation between volatility and activities and a negative correlation between volatility and the bid-ask spread. A negative correlation is observed between the number of deals and the width of bid-ask spread during business hours.

Intra-day Seasonality in Activities of the Foreign Exchange Markets: Evidence from the Electronic Broking System (Subsequently published in "Journal of the Japanese and International Economies", Volume 20, Issue 4, December 2006, pp. 637-664. )

This paper examines intra-day patterns of the exchange rate behavior, using the "firm" bid-ask quotes and transactions of USD-JPY (Alec: The EBS notations define the base currency as the first currency in the name of the currency pair. Note that trading in EBS is done in millions of the base currency) and Euro-USD pairs recorded in the electronic broking system of the spot foreign exchange markets. The U-shape of intra-day activities is confirmed for Tokyo and London participants, but not for New York participants. Activities (deals and price changes) do not increase toward the end of business hours in the New York market, even on Fridays (ahead of weekend hours of non-trading). It is generally observed a negative correlation between the number of deals and the width of bid-ask spread during business hours, but in the first business minutes of Tokyo, bid-ask spread and activities have high correlation. It is also found that the concentration of transaction during overlapping business hours between Tokyo and London markets (London and New York markets) may arise from heterogeneous expectations among participants from different regions, that is waking up of participants of the next region in time line of the day.

"Intra-day Seasonality in Activities of the Foreign Exchange Markets: Evidence from the Electronic Broking System"

This paper examines intra-day patterns of the exchange rate behavior, using the "firm" bid-ask quotes and transactions of USD-JPY (Alec: The EBS notations define the base currency as the first currency in the name of the currency pair. Note that trading in EBS is done in millions of the base currency) and Euro-USD pairs recorded in the electronic broking system of the spot foreign exchange markets. The U-shape of intra-day activities is confirmed for Tokyo and London participants, but not for New York participants. Activities (deals and price changes) do not increase toward the end of business hours in the New York market, even on Fridays (ahead of weekend hours of non-trading). It is generally observed a negative correlation between the number of deals and the width of bid-ask spread during business hours, but in the first business minutes of Tokyo, bid-ask spread and activities have high correlation. It is also found that the concentration of transaction during overlapping business hours between Tokyo and London markets (London and New York markets) may arise from heterogeneous expectations among participants from different regions, that is waking up of participants of the next region in time line of the day.

Price Impacts of Deals and Predictability of the Exchange Rate Movements

This paper examines the price impact and the predictability of the exchange rate movement using the transaction data recorded in the electronic broking system of the spot foreign exchange market. The number of actual deals at the ask (or bid side) for a specified time interval may be regarded as "order flows" to buy (or sell) in Richard Lyons' work. First, the contemporaneous impact of order flows on the quote and deal prices are analyzed. Second, the price predictability is examined. Our forecasting equations of the exchange rate for the next X minutes (X=1, 5, 15, 30) show that coefficients are significantly different from zero in both 5-min and 1-min forecast horizons, but the significance disappears in the 30-minute interval. The t-statistics become larger as the prediction window becomes shorter. Price impacts of deals at one side of the market are significant but short-lived. Market participants, if they can observe and analyze all the transactions information in real time, may be able to extract information to predict the price movements in the following next few minutes.

High Frequency Contagion of Currency Crises in Asia

Using daily data during the period of Asian Currency Crises, this paper examines high-frequency contagion effects among Asian six countries. By identifying the origin' (of exchange rate depreciation, or decline in stock prices) and the affected' (currencies, or stock prices) in spillover relationship, Indonesia and Korea are found to be the two main origin countries, affecting exchange rates and stock prices of other countries. Evidence of high-frequency crisis spillover from Thailand to other countries was weak at best. A positive relationship between trade link indices and the contagion coefficients is found, implying that the bilateral trade linkage is an important factor for currency market participants to expect which currency should be affected within days of an original a shock in the exchange rate of a particular country.

International Reserves and the Global Financial Crisis

This study examines whether pre-crisis international reserve accumulations, as well as exchange rate and reserve policy decisions made during the global financial crisis, can help to explain cross-country differences in post-crisis economic performance. Our approach focuses not only on the total stock of official reserves held by countries, but also on the decisions by governments to purchase or sell reserve assets during the crisis period. We introduce new data made available through the IMF Special Data Dissemination Standard (SDDS) Reserve Template, which allow us to distinguish interest income and valuation changes in the stock of official reserves from the actively managed component of reserves. We use this novel data to gauge how (and whether) reserve accumulation policies influenced the economic and financial performance of countries during and after the global crisis. Our findings support the view that higher reserve accumulations prior to the crisis are associated with higher post-crisis GDP growth.

Bank Restructuring in Asia: Crisis management in the aftermath of the Asian financial crisis and prospects for crisis prevention -Korea-

This paper analyzes the Korean bank restructuring process that started in the wake of its currency crisis of 1997. Korea suffered a heavy currency crisis that was accompanied, if not caused, by acute shortage of dollar liquidity of Korean banks. The currency crisis was essentially banking crisis. This paper covers topics such as the scheme of capital injection to weak banks, nationalization of insolvent institutions, and setting up a strong financial restructuring agency. Structural problem as well as liquidity problem in banks' balance sheets became serious as the currency crisis deepened. On April 14, 1998, the Government announced the basic restructuring framework aiming to stabilize financial markets. The government's restructuring framework included capital injection to financial institutions, mergers and/or closing down of banks, and asset sales. Regulatory institutions, such as the Korea Asset Management Corporation (KAMCO), the Korea Deposit Insurance Corporation (KDIC) and Financial Supervisory Commission (FSC) were also reorganized or newly created around 1997 and 1998. Bank restructuring in Korea, after all, in the aftermath of the Asian currency crisis is almost over. The focus of government-led bank restructuring is now shifted to create market-oriented reform, to ensure peace-time operation, and to strengthen Korean banks so that Korea will no longer have financial crisis. It should be pointed out that decisive actions with massive public funds to restructure the financial sector in crisis are important for a strong recovery possible in the medium term.