To tide you over a bit before the massive data drop by the Federal Reserve in a bit more than an hour, I have some more data on the Hong Kong monetary impact on general market conditions!
Although all types of statistically problematic, the Other Exchange Funds Bills and Notes not held by HK monetary system participating banks seems to have a rather nice little qualitative relationship with the HSI as can be seen in the chart below:
Yes, there are periods where the values are co-moving, but the majority of the movements tend to be in opposite directions. This could be pretty easy to explain: financial institutions simply use their HK$’s of liquidity to buy equities, and the lag could be explained by allowing other actors to off-load shares at lows and buying into them at peaks. This is of course all speculation on my part, but it is an interesting chart, particularly for co-integration purposes and fundamental money management given data bursts. It would also indicate that banks might have been buying recently!
Ready for more quantitative takes on Tuesday’s data dump? More after the jump!
As was expected (feared), there were few data that held up in more strict statistical regressions, particularly on multi-model testing. There was one good survivor though, and that was the total monetary base ran on individual regressions against closing aggregate balances and particularly the cash levels in the HK economy. The results for multiple regression models with both of them? Pretty good too, and the best model result (I won’t go over the failures) was with log-return regressions for all variables in a simple, non-interacting model which feels natural since the overall way to get the total monetary base is by adding the other components. The log-return was surprising, and might indicate a preference. The R results:
- CAB’s reach a total contribution estimate of 13.53% (for every one percent increase/decrease in CAB’s expect a 13.53 bps move in the same direction in the MB. I’ve went over why the scarce data is relatively poor in generating a good model, and using 100% for data points above 2% CAB increase will be a better estimate.
- Cash reaches a 85.86% contribution to MB-values. It seems generally reasonable and largely means the overall model maps 100% contribution as the fundamentals would indicate.
- The chance of a null hypothesis (a false indication of effect) is 0.63% for the CAB’s, and completely insignificant (a zero point [fifteen zeroes] significance) for the cash balances.
- Adjusted model R^2 is at 0.7356, which is incredibly good for a test like this, and the F-statistic is close to 1000, so i think it’s relatively safe to say that the model would work pretty well overall.
- Again, adjusting for dynamic expectations depending on the sign of the CAB change would really help.
Modeling this to changes to the HSI will be pretty difficult since it has so many factors that moves it and overall this variance doesn’t contribute consistently to HSI volatility/variances, and thus render these types of statistical tests somewhat useless in day-trading applications, while having value for long-term investors.
So I’ll throw the day-traders a little bone!
Using the data from Tuesday between overall HSI levels and the monetary base, I have started back-of-the-envelope models of the opening of the Hong Kong – Shanghai Stock Connect and its influence on the HSI. A few assumptions that I’ve made (please ask for the spreadsheet if you want it, but you can probably model it yourself in the time it takes you to email me):
- The initial net inflow into HK that needs to be met with new HK$’s is the daily limit of net investment in China, RMB23.5 billion, HK$29.6 billion or US$3.8 billion, plus commissions for trade facilitation. Because HK$’s need to be bought first, and after an initial “shock” of the first day/week net placement, it should be possible to circulate the same HK$’s for this purpose.
- Hong Kong dollars will primarily be used for this exchange link without acting as an intermediary to global currencies. Or, simply, HK banks and people will make most of the trades. I put this factor at 75%, with 25% overseas involvement. HSI selling locally can be absorbed and circulated by others, and the HSI might be more interesting for foreigners to buy given stricter corporate governance requirements in HK and the competitive advantage on research that local bank units have on China. This is guesswork, and if there is net outflow from HK, the factor becomes larger than 100%, and if foreigners queue up currency in HK to wait for “their turn” to China, this value would be lower than 0% during those days.
- Foreign investment results in 3% of transaction value in commissions and transfer costs paid in Hong Kong and staying in Hong Kong.
- Linear approximations work well since a HSI point represents market capitalization that for all intents and purposes are in US$’s. Since the quota is static rather than a percent of any market capitalization in China, only a static amount of funds can be invested, resulting in lower percentage of capitalization as that same capitalization goes up.
- Each HK$100 million in total monetary base is expected to contribute to 1.6 HSI points.
With this data, it would imply a 480 – 500 HSI point boost from the initial Stock Connect opening, and 3.65 daily points (920 points annually) from commissions and inflows after an initial period of volatility. This model does not include performance payments to financial management firms by foreign clients in the model which would increase this by the performance payment model times the foreign invested capital. (Hong Kong clients paying a performance fee simply result in moving HK$’s from the client to the manager.)