1st Edition

Capital Account Liberation Methods and Applications

By Ying Yirong, Jeffrey Yi-Lin Forrest Copyright 2015
    446 Pages
    by CRC Press

    446 Pages 52 B/W Illustrations
    by CRC Press

    Along with the development of economic globalization, many countries have begun to relax their controls on their capital accounts. However, the recent financial crises in Latin American countries as well as the exchange rate crises in Southeast Asian countries have shown that there is major risk associated with capital account liberalization.

    This book details the benefits and risks of capital account liberalization and explains how to take an open-door policy at the appropriate time in order to reduce the risk to the lowest possible level. Supplying a complete mathematical analysis framework for the study of the problem of capital account liberalization, it presents a few important models that have been developed for the study of capital account liberalization.

    Next, the book examines the influence of capital account liberalization on the stability of financial markets by greatly expanding the scope of ordinary differential equation theory to the analysis of local stabilities. It conveys cutting-edge results while providing a general yet simple analysis framework, enriched with practical experiences from developing countries.

    This book applies the theory of limit cycles to the study of problems related to capital account liberalization and discusses the contagion of financial crises among different countries. Many problems related to capital account liberalization are formulated as optimization models, showing the fact that much broader economic issues can be solved by employing optimization methods.

    The book concludes by comparing the contagion effect of financial markets between nations with a relatively high degree of openness with those characterized by a moderate degree of openness. Explaining how to determine optimal capital inflows and outflows, this book provides you with the understanding required to accurately determine the characteristics, backgrounds, causes, and roles of capital account liberalization and relevant capital flows.

    From Theory to Visualization: General Analysis Framework in Finance
    Mathematical Applications in Finance
         Synergetic Approach
    Mathematical Models in Finance
    Mathematical Principles in Finance
         Financial Balances Equation
         A Model in Canonical Form
         Rationality of Behavior
         Rational Expectations Principle
         Model of the Russian Economy in the Crisis Period
         Model of the Japanese Economy in the Crisis Period
    Mathematical Estimations in Finance
         Introduction
         Estimation
         Conclusions
    Mathematical Approximations in Finance
         Introduction
         Main Results
         Conclusions
    Game Theory in Finance
         Model Assumptions
         Evolutionary Game Model
         Stability Analysis
         Model Summary
    Visualization Technology in Finance
         Introduction
         Self-Organizing Maps
         Clustering of the SOM
         Identifying Systemic Financial Crises

    From Micheal to Heckscher–Ohlin: ODE for Capital Account Liberation
    General Theory of Ordinary Differential Equations
         Basic Concepts of Ordinary Differential Equations
         Systems with Constant Coefficients
    Dynamic Path of Nonperforming Loans: First-Order ODE
         Introduction
         Hypothesis
         The Model
         Analysis
         Conclusions
    Stock Market’s Liquidity Risk: Second-Order ODE
         Introduction
         The Model
         Exogenous Shocks
         Numerical Example
    Stability of Michael Model under Capital Control: Two-Dimensional Systems (I)
         Introduction
         The Model
         Stability Analysis
         Conclusions
    Exchange Rate Fluctuations under Capital Control: Two-Dimensional Systems (II)
         Introduction
         Stability Analysis
         Conclusions
    Dynamic Optimization of Competitive Agents: Three-Dimensional Systems
         Introduction
         The Model
         Analysis
         Conclusions
    Dynamic Heckscher–Ohlin Model: Four-Dimensional Systems
         Introduction
         The Model
         Local Stability Analysis
         Conclusions
    Instability: Risk of Capital Flow
         Introduction
         Instability σ
         Empirical Examples
         Conclusion

    From European to Asian Option: PDE for Capital Account Liberation
    General Method of Parabolic Partial Differential Equations of Second Order
    Pricing of Carbon Emission Cost: Linear Parabolic PDEs (I)
         Introduction
         The Model
         The Calculation
         Conclusions
    Pricing of Foreign Currency Option: Linear Parabolic PDEs (II)
         Introduction
         The Model
         The Solution
    Pricing of Credit Default Swaps: Linear Parabolic PDEs (III)
         Introduction
         The Model
         The Solution
    Pricing of Forward Exchange Rate: Linear Parabolic PDEs (IV)
    Pricing of Arithmetic Average Asian Option: Nonlinear Parabolic PDEs(I)
         Introduction
         The Lemma
         Decomposition of the Solution
         Estimation for Error
         Estimation of the Error Term
         Conclusions
    Pricing of European Exchange Options: Nonlinear Parabolic PDEs (II)
         Introduction
         Foreign Exchange Option with Fractional Brownian Motion
         Conclusions

    From Financial Crises to Currency Substitution: Limit Cycle Theory for Capital Account Liberation
    General Theory of Limit Cycles
    Poincare Problem: Quadratic Polynomial Differential Systems (I)
         Introduction
    Foreign Assets and Foreign Liabilities: Quadratic Polynomial Differential Systems (II)
         Introduction
         Macroeconomic Model
         Dynamics Analysis
         Conclusion
    Dynamics of Employment: Cubic Polynomial Differential Systems (I)
         Introduction
         Model
         Calculation
         Conclusions
    Contagion of Financial Crisis: Cubic Polynomial Differential Systems (II)
         Introduction
         Model
         Analysis
         Conclusions
    Contagion of Currency Crises: Fractional Differential Systems (I)
         Introduction
         Model and Analysis
         Conclusions
    Contagion of Currency Crises with Extra-Absorption: Fractional Differential Systems (II).
         Introduction
         Dynamic Model between Two Countries
         Stability Analysis
         Conclusions
    Thomas Constraint in Currency Substitutions
         General Theory
         Extended Thomas Model
         Conclusions
    Relative Risk Aversion Coefficient
         Introduction
         Analysis of Relative Risk Aversion Coefficients
         Conclusions

    From Normal to Abnormal Flow of Capital: Optimizations for Capital Account Liberation
    Optimization Models in Finance
         Hot Money and Serial Financial Crises: Objectives with Recursively Defined Variables
         Dutch Disease and Optimal Taxation: Objectives with Linear Multivariable
         Optimal Growth Rate of Consumable Resource: Objectives with Discrete Variables
         Dynamics of Ecosystem Service Provision: Objectives with Bivariate Factors
         Illiquid Markets with Discrete Order Flows: Objectives Double Integrals
         Optimal Time of Removing Quarantine Bans: Objectives with Infinite Integrals
         Risk Premium and Exchange Rates: Objectives with Utility Function
         Endowment Risk and Monetary Policy: Objectives with Integrals of Utility Functions
    Optimal Asset Allocation: Continuous Objective Functions
    Verdier Equation: Differential Constraint Conditions
         Introduction
         Solution of Verdier Equation
    Asset Pricing Based on Quadric Programming: Discrete Objective Function
         Introduction
         Modeling
         Solutions of (P1)
         Example
         Conclusions
    Abnormal Flows of Capital: Discrete Constraint Conditions
         Introduction
         Model
         Visualization
         Numerical Example
         Conclusions

    From Underground Economics to Financial Contagion: Regressions for Capital Account Liberation
    General Methods of Regression Analysis
         Sample Mean
         Linear Regression Model
         Mean of Least-Squares Estimator
         Variance of Least-Squares Estimator
         Gauss–Markov Theorem
         Residuals
         Estimation of Error Variance
         Mean-Square Forecast Error
         Covariance Matrix Estimation under Homoskedasticity
         Covariance Matrix Estimation under Heteroskedasticity
         Measures of Fit
    Who Controls the Future? Presidential Election and Economic Policy in America
         Background
         Model
         Data
         Regression Results
    Gone with the Wind: Cigarette Taxes in the State
         Background
         Data
         Linear Regression Model
         Conclusions
    Undercurrents: The Underground Economy and Financial Development
         Background
         Linear Model
         Data
         Conclusions
    Who Cares about My Health? The Baumol Model
         Background
         Nonlinear Model
         Regression Results
         Conclusions
    Sail against the Current: Held Currencies in Own Hands
         Background
         Model
         Data
         Conclusions
    Nowhere to Hide: Financial Contagion Effects
         Background
         SVAR Modeling
         Regression
         Financial Contagion Effect between Markets with High Capital Account Openness
         Financial Contagion Effect between Markets with At Least Moderate Capital Account Liberation

    References
    Index

    Biography

    Ying Yirong is professor of finance and is associate chair of the Department of Finance, College of Economics, Shanghai University, Shanghai, China. He earned his BSc in mathematics in 1982 from the Mathematics Department of Northwest University (China) and his PhD in mathematics in 2000 from the Mathematics Department of Xidian University. In 2002, Dr. Yirong did one year of postdoctoral study at the Institute of Contemporary Finance, Shanghai Jiao-Tong University.

    Professor Yirong has taught many different courses in the areas of economics and finance, such as econometrics, financial economics, financial physics, applied statistics, financial engineering, economic cybernetics, and low carbon economy. His research interests include financial engineering, financial mathematics, securities pricing, and risk management.

    Jeffrey Yi-Lin Forrest holds all his educational degrees (BSc, MS, and PhD) in pure mathematics, respectively, from Northwest University (China), Auburn University (United States), and Carnegie Mellon University (United States), where he has one-year postdoctoral experience in statistics. Currently, he is a guest or specially appointed professor in economics, finance, systems science, and mathematics at several major universities in China, including Huazhong University of Science and Technology, the National University of Defense Technology, and Nanjing University of Aeronautics and Astronautics, and a tenured professor of mathematics at the Pennsylvania State System of Higher Education (Slippery Rock campus). Since 1993, Dr. Forrest has been serving as the president of the International Institute for General Systems Studies, Inc. Along with various professional endeavors he has organized, Dr. Forrest has had the honor to mobilize scholars from more than 80 countries representing more than 50 different scientific disciplines.