Capital Account Liberation : Methods and Applications book cover
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Capital Account Liberation
Methods and Applications





ISBN 9781138894563
Published November 8, 2019 by CRC Press
446 Pages

 
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Book Description

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.

Table of Contents

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

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Author(s)

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.