Mitigating market risks in the ASEAN ecosystem to foster inclusive growth

Abstract

Abstract. Inclusive rather than exclusive growth is the consideration of most development strategies in charting the economic growth of their country. The ASEAN as a single market and collective body should consider this as its paramount concern. Now part of inclusive growth strategies is to identify the risks and impediments to its realization. Now generally there are two types of financial risks namely: market systemic risks and the unsystemic risk. The unsystemic risk is mitigated by the Markowitz portfolio theory that was subsequently improved by Sharpe with the Capital Asset Pricing Model (CAPM). Portfolio theory relies on the comfort of large numbers. If you have only one investment avenue and it fails then you lose all your investment but if you spread it over 40 investment destinations then you are virtually insulated provided the investments are inversely correlated. If these are positively correlated then it follows only one direction and will simulate market systemic risk. Market risk is unexplored territory. The Mexican hat wavelet theory was used to plug the unequal equation. The U.S. government used a combination of bailout plan and stimulus package that Krugman criticized since the size of the package is a hit or miss game. If it is too much then fiscal imbalance might happen that will trigger budget deficits. If too little then no stimulus will happen. Krugman proposed exchange rate modification to make your currency cheaper for exports as an improvement of the Mundell Fleming model. Economics is interrelated and interconnected and this is very evident in financial economics. Mitigating market systemic risks relies on the interdependence on interest rates, stimulus package, and foreign exchange into an algorithm that involves the Mexican hat wavelet equation.

Keywords. Mitigating market risks, Mexican hat wavelet, Systemic risk, Portfolio theory, Mundell-Fleming model.

JEL. C40, C50, C57.