Date post: | 03-Apr-2018 |
Category: |
Documents |
Upload: | jeanmeilhoc |
View: | 214 times |
Download: | 0 times |
of 12
7/28/2019 Japan Strategy
1/12
MONETARY POLICY AND EXTREME VALUES
LETS TALK ABOUT RISK
01
DATE:JUNE,2013
SUMMARY REPORT
AUTHOR:JEAN MEILHOC
Twitter: jeanmeilhoc
Linkedin: Jean Meilhoc
Scribd: jeanmeilhoc
7/28/2019 Japan Strategy
2/12
SUMMARY
I. JAPAN BOLD MONETARY POLICY: VIRTUOUS
CYCLE OF REFLATION ............................................................. 3
I.IBOLD MONETARY POLICY SUPPORT FROM BANK OF JAPAN AS
KURODA IS INSTALLED ................................................................... 3
I.IIPRO-GROWTH ABE ADMINISTRATION TO PURSUE KOIZUMIS
UNFINISHED BUSINESS..................................................................... 3
I.IIIPOSITIVE CHANGES FOR EQUITY MARKET SUPPLY/DEMAND
AND VALUATION ............................................................................. 3
II. LETS TALK ABOUT RISK ................................................... 5
II.IVARIANCE WITH ONE SOURCE OF RISK..................................... 5
II.IIIVARIANCE WITH TWO SOURCE OF RISK.................................. 5
II.IVVALUE AT RISK...................................................................... 6II.VCOMPUTATION......................................................................... 9
CONCLUSION .............................................................................. 12
KEY WORDS: MACROECONOMICS; MONETARY POLICY; BANK OF
JAPAN (BOJ); QUANTITATIVE EASING (QE); INFLATION; RISK
MANAGEMENT; QUANTITATIVE ANALYSIS; VALUE AT RISK; VAR
ONE;DELTA VAR
7/28/2019 Japan Strategy
3/12
I. JAPAN BOLD MONETARY POLICY: VIRTUOUS CYCLE OF
REFLATION
I.I Bold monetary policy support from Bank of Japan as
Kuroda is installed
Pre-requisite for equity investors nowadays as liquidity drives
markets
Inflation likely to move into positive territory by 2014
New era of weak yen following end of sage have status
I.II Pro-growth Abe administration to pursue Koizumis
unfinished business
Willing to open its market through new trade agreements
Implies accelerating restructuring and improved efficiency at
companies
Aiming to unlock the cash from Japan Incs balance sheet to
restart the economy
I.III Positive changes for equity market supply/demand
and valuation
Domestic investors both retail and institutional set to rethink
their equity allocations
Positive impact of mild inflation on valuations
7/28/2019 Japan Strategy
4/12
Robust Monetary
Policy Through QE
and Asset purchases
Inflation created
through debt
monetization and
through foreign goods
whose real value in
Yen rise
Yen weakening
Higher Corporate
earnings
Changing expectationsof economic agents:
Hoarding cash is no
longer a winning
game and Wealth
effect
Consumer activity
increases as well as
corporate re-leverage
Wages increase and
goods and assets pricesrise
TRUST
Inflation
Trade balancekeeps
deterioratin
Foreign direct
investment
exceeds current
account surplus
Life insurers
will likely
reduce their
currency
hedge ratios
and
generate huge
pressure to sell
7/28/2019 Japan Strategy
5/12
II.LETS TALK ABOUT RISK
Having discussed the various kinds of returns in considerable detail
in a range of research papers, we now turn to measures of riskiness of
Japanese investment. Just like return, there are various kinds of risk.Fluctuation prices could be measurable by statistical distributions.
We will consider the total risk of an asset or a portfolio of assets as
measured by its standard deviation, which is the square root of
variance.
II.I Variance with one source of risk
Variance is a measure of the volatility of returns. It is computedas the average squared deviation from the mean
Higher variance suggests less predictable profitability
The standard deviation of returns of an asset is the square root of
the variance of returns. Written !2
, we have:
!=
(Ri!)2
i=1
n
"
n!1. Y
, with:
o Ri the return for period i, calculated as R =Pt
Pt!1
!1
o P is the price of the asset
o n the total number of periods, assuming that it is the
sample of the population of returns, and
o =
Xi
i=1
n
!
n
o We also annualized !2
by multiplying by the square
root of a Y (252 days). It is usually the case in the
investment world where we only have a sample ofreturns available instead of the population of returns. The
above expression is useful to underestimates the variance.
II.III Variance with two source of risk
Like a portfolios return, we can calculate a portfolios
variance
When computing the variance of portfolio returns, standard
statistical methodology can be used to find the variance of
7/28/2019 Japan Strategy
6/12
the full expression of portfolio return. Although the return of
a portfolio is simply a weighted average of the returns of
each security this is not the case with the standard deviation
of a portfolio unless all securities are perfectly correlated,
with !=1
The standard deviation of a two-asset portfolio is given by
the weighted square root of the portfolios variance:
!p= w
1
2!
1
2+w
2
2!
2
2+2w
1!
1w
2!
2"
1,2. Y
, where
o w1 and w2 is the amount of money invested in the
first and the second asset respectively.
II.IV Value at Risk
In evaluating investments using expected return and variance,
risk managers make two important assumptions.
o First, they assume that the returns are normally
distributed because a normal distribution can be fully
characterized by its mean and variance first and second
moment respectively
o Second, they assume that markets are not only
informationally efficient but that they are also
operationally efficient.
Returns, however, are not normally distributed; deviations from
normality occur both because the returns are:
o skewed, which means they are not symmetric around the
mean and
o the probability of extreme events is significantly greater
than what a normal distribution would suggest referred
to as kurtosis or fat tails in a return distribution. High-
risk profile among the mean could be observed.
In financial mathematics and financial risk management, Value at
Risk is a risk measure of the risk of loss on a specific portfolio of
financial assets It is defined by risk exposure at a given probability level at a
specified time horizon
Mathematically, we have: VaR(q) = Ptwt.!NA.T.S
!1(q)
where:
o Pis the price of the asset in time t
o w the amount invested in the asset
o !N
Athe volatility calculated above regarding one or two
source of risks
o Tthe square root of the time horizon divided by Yand
o the distribution assumption S!1(q) . The latest
characterizes the inverse Student-t distribution On
7/28/2019 Japan Strategy
7/12
Excel: =-TDIST(1-q; DF), with DF, the degree of
freedom. This distribution take into account the fat tails
explained in section II.I. or mathematically:
!1
k!
"k+1
2
#
$
%&
'
(
"k
2
#
$%
&
'(
1+t2
k
#
$%&
'(
t+1
2
)
*
+
+++
,
-
.
..
.
!1
-3
-2
-1
0
1
2
3
0% 25% 50% 75% 100%
Inverse cumulated normal [N(x)] & Student-t [F(x)]
distribution
-N-1(x) -F-1(X)
7/28/2019 Japan Strategy
8/12
x0.1
%
1%
2%
5%
10%
20%
30%
40%
50%
60%
70%
80%
90%
95%
99%
99.9
%
-N-1(x)
-3.1
-2.3
-2.1
-1.6
-1.3
-0.8
-0.5
-0.3
0.0
0.3
0.5
0.8
1.3
1.6
2.3
3.1
-F-1(X)
-22.3
-7.0
-4.8
-2.9
-1.9
-1.1
-0.6
-0.3
0.0
0.3
0.6
1.1
1.9
2.9
7.0
22.3
7/28/2019 Japan Strategy
9/12
II.V Computation
By importing data from Bloomberg
PX_LAST
NKY Index
EURJPY Curncy From 6/14/10 to 6/13/13
we calculated Value at Risk shown below:
Global parameters: VaR NKY Index
Confidence Interval (q) 95.0%
Time 1
DF 2
Time horizon (year) 0.063
Student -F-1(1-q) 2.9
Date 13/06/13
Price () 12445
EURJPY 126
Nb stocks 1
Volatility 22%
Position 12445
Price Std Dev () 174
Position Std Dev () 174
VaR(q) (in )..................... 507
VaR (q) (in %)................... 4.1%
Value at Risk
Global parameters:
Confidence Interval (q)
Time
DF
Time horizon (year)
Student -F-1(1-q)
Date
Price ()
EURJPY
Nb stocks
Volatility
Position
Price Std Dev ()
Position Std Dev ()
VaR(q) (in ).....................
VaR (q) (in %)...................
Value at Risk
VaR EURJPY
95.0%
1
2
0.063
2.9
13/06/13
12445
126
1
13%
126
1
1
3
2.4%
7/28/2019 Japan Strategy
10/12
Global parameters:
Confidence Interval (q)
TimeDF
Time horizon (year)
Student -F-1(1-q)
Date
Price ()
EURJPY
Nb stocks
Volatility
Position
Price Std Dev ()Position Std Dev ()
VaR(q) (in ).....................
VaR (q) (in %)...................
Value at Risk
Delta VaR
95.0%
12
0.063
2.9
13/06/13
12445
126
1
27%
12445
213213
622
5.0%
7/28/2019 Japan Strategy
11/12
0
50
100
150
200
250
6/14/10 6/14/11 6/14/12
Delta VaR B(100)NKY IndexEURJPYPoly. (Delta VaR B(100))
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Delta VaR NKY Index EURJPY
7/28/2019 Japan Strategy
12/12
CONCLUSION
As a conclusion:
Inflation created through debt monetization and through foreign
goods whose real value in Yen rise
Changes expectations of investors Capital expenditure and acquisitions as well as consumer
activities boost micro and macro economics
Snowball effect Good opportunity to invest in Japan
Risks need to be determine through Japanese investments as well
as Yen currency
Value at Risk threshold is computed thanks Student distribution
to catch skewness and kurtosis uncertainty
NKY Index crossed Delta VaR threshold: it means risk is higher
than expected return opportunities. Investors have to buy a put orsell a call, or short the market. However, it becomes to go down.
Investors have to be prepared to change their positions slightly to
avoid liquidity risk
Delta VaR can easily be adaptable in CPPI or OBPI strategies