1. Volatilities in the Financial Markets and Global Imbalances July 7th, 2014 Institute for International Monetary Affairs 1

2. Our Research on IIMA Global Market Index IIMA developed IIMA Global Market Volatility Index (IIMA- GMVI) to measure global investors’ appetite and tolerance for risks in the financial markets. Its linkage and spillover effect in regional financial markets can be understood by examining the sub-indices. Long low volatility periods in financial markets might lead to an unwanted accumulation of macroeconomic imbalances. Volatility indices can be used as leading indicators of global imbalances and financial crises. 2

3. What’s IIMA Global Market Volatility Index? ・ IIMA-GMVI is the composite index of daily volatilities calculated from the daily movements in stock indices, government bond yields, and foreign exchange rates on major markets in 22 countries*. ・ The composite index is weighted by nominal GDP of each country chosen above. ・ The average level is designed to be equal to 3. 3 *Countries ： the United States, Canada, Mexico, Brazil, Chile, Japan, China, South Korea, Indonesia, Thailand, Malaysia, India, Australia, the United Kingdom, Germany, France, Italy, Spain, Russia, Poland, Turkey, South Africa

4. IIMA Global Market Volatility Index 4

5. IIMA Global Market Volatility Index （ Stock, Bond, Currency) 5 IIMA Global Market Volatility Index is the sum of 3 volatility Indexes

6. IIMA Global Market Volatility Index (Advanced and Emerging markets) 6

7. Volatility indices for individual markets (trial calculation) 7

8. The correlations of IIMA-GMVI and advanced countries’ volatility index are high. 8

9. 9 The correlation between IIMA-GMVI and single country’s volatility index is stronger in such countries where current accounts are in deficit (left), and which have a large net indebted position in external investment excluding direct investment (right). Imbalances strengthen the sensitivity of IIMA-GMVI

10. Risk asset prices fall when IIMA-GMVI rises 10

11. The impacts of long low volatility period IIMA estimates that the long low volatility periods empirically lead to such macroeconomic imbalances as shown below. ・ Excessive current account surplus or deficit ・ Excessive appreciation or depreciation of Real effective exchange rates (REER) ・ Excessive rise of real housing price ・ Excessive rise of private debt 11

12. The case of Asian Crisis IIMA-GMVI had been subdued before the start out of Asian crisis in July, 1997. (the period: October, 1995-April, 1997) Current account deficit widened and REER rose in Asian countries gradually in these periods. (e.g. Thailand, Indonesia, South Korea, Malaysia) Japanese yen fell gradually for these periods. 12

13. The case of Global Financial Crisis 13 IIMA-GMVI had been long subdued before the start of Global financial crisis in August, 2007. (the period:2004/9-2007/7) Current account deficit of the US, Southern European countries, Oceania countries widened and REER of commodity exporting countries, emerging countries rose gradually in these periods. Globally, real estate markets overheated and private debt drastically increased. Japanese yen fell gradually in these periods.

14. Implication of Present Situation 14 IIMA-GMVI has been subdued especially in advanced countries since October, 2013. Some emerging countries still continue some corrections from FED tapering dispute in May, 2013. Common points Asset inflation is continuing in real estate and stock markets. Some currencies have risen or fallen to recent historical high or low levels (NZ, Australia are high, Japan are low) Different points Volatilities of advanced countries are subdued, but those of emerging countries are still high. Global current account imbalance is smaller than before GFC.