Using machine learning to measure financial risk in China

Alexander Al-Haschimi, Apostolos Apostolou, Andres Azqueta-Gavaldon and Martino Ricci in this ECB paper:

We develop a measure of overall financial risk in China by applying machine learning techniques to textual data. A pre-defined set of relevant newspaper articles is first selected using a specific constellation of risk-related keywords. Then, we employ topical modelling based on an unsupervised machine learning algorithm to decompose financial risk into its thematic drivers.

The resulting aggregated indicator can identify major episodes of overall heightened financial risks in China, which cannot be consistently captured using financial data. Finally, a structural VAR framework is employed to show that shocks to the financial risk measure have a significant impact on macroeconomic and financial variables in China and abroad.

 

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Greenium in India’s sovereign green bonds

The Government issued the first green bonds today. There was high investor interest in the bonds.

The government has earned a green premium or greenium on the bonds by around 5-6 bps.

Reserve Bank of New Zealand to build foreign exchnage reserves

Before 2008, the consensus was central banks should just target inflation and leave everythig else.  Post 2008 crisis, all kinds of things happening in world of central banking. The objectives are constantly expanding from monetary stability to growth, unemployment, financial stabiliy, climate change and so on.

Reserve Bank of New Zealand which pioneered inflation targeting was seen behind the pre-2008 consensus. All this is changing big time. The objective has been expanded to included financial stabiluty and employment.

As per latest developments, the central bank has signed an agreement with the government to intervene in foreign exchange markets and build foreign exchange reserves

We hold and manage foreign reserves in order to be able to intervene in the New Zealand dollar (NZD) market for financial stability or monetary policy reasons. Foreign reserves are safe and liquid assets held in currencies, such as United States dollars, Euros, and Australian dollars.

Our chairman Professor Neil Quigley says a well-functioning foreign exchange market is critical to New Zealand’s economy with many people — including exporters, importers, borrowers and investors — reliant on these markets to exchange New Zealand dollars for foreign currency.

“While foreign reserves are rarely used, it is important for us to be prepared to support the foreign exchange market in exceptional circumstances to maintain financial stability and ensure essential transactions can continue to occur.”  

As part of the framework, both the Reserve Bank and the Minister of Finance are required to agree to a level of foreign reserves that we should hold in order to meet our objectives. The level of foreign reserves had been largely unchanged since 2007. 

Given the growth in the economy and foreign exchange market since then, the Minister of Finance and our Board have agreed that an increase to foreign reserves holdings is needed. 

“The transition to this higher level of foreign reserves will take place over a number of years, in order to minimise the market impact,” Governor Adrian Orr said.

Due to market and policy sensitivities, we do not intend to make public any further details on the size or composition of this increase. However, our foreign reserves holdings will continue to be published on our website on a monthly basis.  

The Framework maintains the Monetary Policy Committee’s right to intervene in the exchange rate when the New Zealand dollar has moved to exceptionally low or high levels that cannot be justified by economic fundamentals. Interventions are expected to be rare and consistent with the Reserve Bank’s monetary policy objectives.

Interesting!

Tribute to Mr BV Doshi

The highly accomplished architect Mr BV Doshi passed away in Ahmedabad yesterday. I am not a student of architecture and have no idea about the subject. However, I have had the privilege to study and work in his designed architectures of excellence. I just want to thank you Sir for imagining the unimagined.

For the unititated, see his video on his thoughts and philosophy on designing campus of IIM Bangalore.  We barely pay attention on what thinking and effort goes into designing fine architecture.

Prof Chinamy Tumbe pays a fine tribute. Mr Bimal Patel of CEPT University shares memories.

Common Currency for Latin American: Neymar and Messi in the same team doesn’t always work

My explainer in Moneycontrol on the proposed currency union in Latin America and Caribbean islands.

Austrian Economics as a relevant research program

Prof. Daniel J. Smith of Middle Tennessee State University in this paper argues for relevance of Austrian economics:

What is the relevancy of modern Austrian economics? Austrian economics, from its origins, has attempted to push economics towards greater relevance by developing and refining a methodological approach that enhances the operational validity of its scientific conclusions for decision-making in the real world. In a theoretical paradigm, this led to the development of theoretical insights on significant economic phenomena often excluded from static economics models. As the economics profession took an empirical turn, modern Austrian economics has demonstrated its continued relevancy through empirical methods that apply economic theory to pressing, long-standing policy issues.

What is relevancy:

…what I mean by relevance is specifically that we do scientific research with policy relevance and that we arrive at scientific conclusions that do not rely on limiting assumptions to the extent that would lead to potentially adverse unintended consequences if used today or in the future, as a basis for real-world decision-making (see, for instance, Munger 2022). It is the distinction, according to Radomysler (1946, p. 198), “between theory that does apply to reality and theory that does not.” An academic can eschew public policy and be wholly concerned only with long-standing problems in political economy but still seek to produce relevant research under this definition.