Proactive Structural Simulation of Macro Stress Tests :, Macro Financial Monetary Economic Integration and Impact on Asset Pricing , Inflation and Market, Credit Risks Valuation Integration and  Financial Systemic Instability Risk Early Warning supporting Financial Systems Regulation Reform

Warren Huang    OSA  Intl   Operations Analysis  San Francisco, Ca., USA

Website :www.osawh.com /  www.osaglobalstrategicmanagement.com  email: wh3928@yahoo.com

Fenglan Zhang,  Zhejiang University, , China  joycezhang001@yahoo.com.cn,  
 
Comment by Warren Huang - May 30, 2008 Wall Street Journal Real Time Economics at 1:13 pm

  Rescue Bear Stearn , and later  AIG, Fannie Mae and Freddie Mac cases looks like similar LTCM,  which  default spread into the whole US, Global financial systems and markets  due to its interrelated business in  global markets. But we are facing much more complicated , instability in uncertain background of continued housing price slump and complicated highly leveraged structural financial MBS, CDO, CDS products and poor rating methods (MBS,CDO) using oversimplified betting on the wrong side of investment.
The worst of the crisis is not over until housing price slump is over, it is not that easy to stop by rate cuts and bail out
details on www.osawh.com/Fedcrisab.htm  www.osawh.com/finstab1.htm www.osawh.com/mortdefa.htm
www.osawh.com/centmaf.html www.osawh.com/ABS.html                                           
                                                                                      Abstract

 This paper demonstrated Huang’s 30 years pioneering proactive, structural global  macro, financial, industrial econometrics integration simulation tracking forecast year, month ahead  of  last 30 years economic boom and bust recession cycles, equities, bond, commodities, housing assets prices bubbles bursts resulted financial systemic instability Operations Simulation Analysis (OSA).
Thousands proactive structural  dynamic simulators integrating global  micro, macro, financial , industrial economic fundamentals into proactive structural dynamic high frequency ( short term ) and low frequency (long term )quantitative expert systems replacing current 30 year old probabilistic,( Monte Carlo ) statistical systemic risks and   financial decision and  credit rating, risks valuation betting on the wrong side of investment and risks
These systems replace current probability approach macro stress modeling scenario approach  betting  on the wrong side of housing, equities, commodities bubble burst resulted  trillion dollars loss in banking, financial  defaults crisis    http://www.bis.org/publ/work165.pdf
 Zhang Performed all  E-Spline GARCH with Granger co-integration causes and consequences econometrics analysis models have been developed, implemented for China/US, Taiwan and international integration of  financial markets and institutions products, services, and converging regulatory and competitive conditions.
These models tracking forecast, predicted years, month ahead of last 30 years US, Asian, European, Russian central banks monetary, economic, fiscal policy impact on macroeconomic, industrial sectors asst prices bubbles boom and bust recession cycles,  Identifying and Resolving Financial Crises,  inflation, daily interest rates, currency, financial market housing, equities, commodities, structured derivatives on housing mortgage assets MBS, CDO, CDS  assets prices valuation mechanism and the causes, onset, spread, rescue, intervention impact and costs to economic boom and bust recession cycles ,financial instability systemic risks,  corporate, consumer mortgage loan default crisis Impact on multibillion balance sheet write down, bankruptcy and trading fraud scandal cycles early warning predicted with average error below 2 %, correlation constant greater than 0.96
These proactive, structural simulators have been implemented for providing the what, why, how and timing of  global strategic decision analysis for:
1. Macro, financial monetary, economic, fiscal policy and  financial markets  Contagion 
   Mortgage default and relation to MBS, CDO, CDS, derivatives asset pricing mechanism, MBS, CMBS simulation shown investment banking betting on the wrong side of interest rate and housing prices and CDO, MBS  mortgage bond, resulted huge trillions  write down created financial systemic risks instability

2.  Stability effects of international integration for crisis,  systemic risks  contagion prevention
   SHSZ 300 index simulation integrated US Dow Jones bear market correction spread into China and global indices 
3.  Real implications of financial  systemic instability -
   Proactive structural dynamic housing mortgage default simulation, equities, commodities, oil, metals prices bubble simulation, 
   Interactions between inflation and currency, equities prices, housing prices bubble burst.
  Mortgage loan default impact on monetary policy, interest rate and inflation, economic recession 
 
Macro economic monetary policy, interest rates, unemployment rate impact on national and regional housing prices   
4. Optimal Central banking policy trilemma solution for growth, asset prices , CPI price  macro economic systemic risks and currency stability risks
These systems predicted on June 2007 Peking University Int’l Financial Risk management conference that US housing bubble burst facing loan default risks and again last Sept Wall Street Journal real time economic blog that US Fed rate cuts will not stop housing bubble burst price slump through 2009,  , drag economy into recession, US and global stock market into bear market correction
 

Keyword :US/China/Global, Economic recession cycles, housing , equities bubbles burst, financial instability  Operations Simulations Analysis, proactive structural CAPM ,  micro, macro- financial integration  financial instability  Basel II credit, market risks , monetary policy   CDO mortgage default.  policy contagion  
Submitted to 2ND CENTER OF INTERNATIONAL BANKING, INSURANCE, FINANCE  CONFERENCE . May  26, 2008

Introduction 

Proactive structural, dynamic global financial systemic risks, crisis OSA for early warning

What is OSA and its proactive structural dynamic assets prices bubbles burst crisis , risks early warning :
Global economy and financial markets are facing boom and bust cycles and financial crisis every few years due to current reactive macro, micro and monetary economic theory and policy and asset pricing still rely on 30 year old probability, statistical reactive decision analysis. It fail to develop, implementing proactive structural dynamic simulation, integrating monetary, economic, fiscal policy impact into macro, industrial sectors,  capital, market asset prices and micro economic performances. Which often resulted betting on the wrong side of investment resulted trillion dollar market loss and default.

Huang pioneered  the innovation in proactive structural dynamic global assets pricing mechanism valuation and strategic

housing, capital markets credit, market risks early warning OSA ( Operations Simulations Analysis).
He extend moon landing guidance , control in his Ph.D thesis, on “ Real Time Nonlinear Kalman Filtering and Control

with Applications to Chemical Reactors Control “  to  real time macro, financial, industrial econometrics systems

simulation and integrating economics, market fundamentals into proactive structural dynamic quantitative models.
He pioneered two master hands controlling global macro economy, finance, industrial sectors demand, prices , daily

capital  markets asset prices mechanism,  tracking central banks monetary, economic, fiscal policy impact on economic

boom and bust recession cycles inflation, daily interest rates, currency,  oil,  commodities, downstream industrial

sectors demand, prices mechanism. 

These proactive, structural simulators have been implemented for providing the what, why, how and timing of  global strategic decision analysis for:
1. Policy and  financial markets  Contagion 
   Mortgage default  simulation shown investment banking betting on the wrong side of interest rate and housing prices and CDO mortgage bond, resulted huge write down created financial system instability

   SHSZ 300 index simulation show Interactions between US/China  markets, Dow Jones impact on ShSZ 300  and financial institutions  index fund and BRIC ETF investment  risk
2.  Stability effects of international integration 




 
 
 
 
 
 
 
   SHSZ 300 index simulation integrated US Dow Jones bear market correction spread into China and global index 
operational risks
3.  Real implications of financial stability -




 
 
 
 
 
 
 
   Proactive structural dynamic housing mortgage default simulation, equities, oil, commodities asset prices bubble simulation, risk early warning
   Interactions between inflation and currency, equities prices, housing prices bubble burst.




 
 
 
 
 
 
 
China credit tightening impact on housing prices bubble bursts resulted SHSZ 300 plunged into bear market correction from 6000 to 4200.
   Mortgage loan default impact on monetary policy, interest rate and inflation, economic recession    
4. Optimal Central banking policy trilemma solution for growth, asset , CPI price and currency stability 




 
 
 
 
 
 
 
These systems predicted on June 2007 Peking University Int’l Financial Risk management conference that US housing bubble burst facing loan default risks and again last Sept Wall Street Journal real time economic blog that US Fed rate cuts will not stop housing bubble burst price slump till summer 2008, drag economy into recession, US and global stock market into bear market correction




 
 
 
 
 
 
 
  He developed, implemented thousands proactive structural, dynamics simulators for Mobil Oil  US headquarter ,

patented oil/downstream prices mechanism for strategic investment, supply chain and  published on US Houston Gulf

Publishing www.osawh.com/hp2001h.html , applied to 80 countries multinational oils companies, extended to thousands

global optimal proactive structural central banks monetary policy tri-lemma solution, achieving sustainable growth and

financial markets asset prices, inflation, currency stability ( www.osawh.com/centmaf.html ) and banking, finance, energy,

IT demand, pricing mechanism, asset allocation strategy, wrote thousands articles in China, Taiwan, US, warned top

global investment bankers US, China housing bubble  2003 on Singapore, Shanghai Euro-event Asian/China Finance,

Capital Market conferences and again, June 2007,Peking University global financial management conference that US

housing price slump, mortgage default continue into 2008 drag economy into recession and US, global stock markets bear

markets correction and China credit tightening continue into 2008 fighting housing and stock markets excessive liquidity..
He also predicted years, months ahead of last 20 years bull/bear trend of daily global  financial market prices, causes

onset, spread, recovery, early warning of global financial, asst prices bubble burst crisis.

Thousands TV, radio, master class workshops lectures has been offered to China, Taiwan, US 15 cities 30 million 

institutional and private investors, OPEC, global central banks, economists.
He taught industrial economics, global strategic management, process simulation, control for Taiwan, Tunghai

Universities, lecturing Peking, Fudan, Shanghai Finance, Economic Universities financial engineering, China Finance,

Capital Markets reform innovations
This work include the development, implementation of neural bet based expert systems based OSA and Zhang

extension to Engle- Exponential GARCH with co-integration into Granger causes and casualty analysis of optimal

US/China central bank tri-lemma solution and the causes, onset, spread,  intervention/cost, recovery, early warning of

stock , housing prices bubbles burst associated mortgage default credit crisis simulation.  

These models tracking simulation also include integration of monetary policy, interest rates, inflation, currency, housing

price impact on Dow Jones, global stock indices and integrating into unemployment rate global stock indices impact on

regional, national housing prices and loan credit  default simulation.

 

These Engle/Granger time series causes and casualty analysis also supporting Huang’s 30 years proactive structural

OSA modeling simulation forecasts analysis, tracking the causes, onset, recovery, early warning of current US housing price bubble burst, mortgage default credit crunch crisis indicating mortgage default risks are caused by  stick to incomplete reactive core inflation and CPI inflation models, ignoring and underestimated  commodity index ( oil commodity prices) and average housing prices up 50 % during 2002- 2006 , coastal cities prices up 300 % impact on inflation,  excessive Fed fund rate cuts to 1.0 %,  and 40 year low mortgage rate at 5.1 % in 2004-2005 , despite 17 rate hikes to fight inflation, it  was to little, too late , while mortgage rate and long term bond yield stay below 5 %  were very inflationary resulted speculative purchase and financing created soaring housing prices bubbles and banking, finance stock prices bubble, ( commodity index doubled from 220 to 475 , oil price soared 500 % from 18 to 100 , the default rate more than doubled since June 2007 as mortgage rate rebound from 5.7 % to 6.7 % , while the housing prices peaking out and down 10 %- 20 % in different area drastically increased poor credit sub-prime adjustable rate mortgage home buyer prepayment and monthly interest payment cost.

Despite monetary policy is not direct cause of default due to central bank only focus on underestimated core

Inflation and unemployment (exclude food, energy cost ), ignoring housing and equities, currency, commodities prices

bubbles..  Excessive rate, tax cuts however, lead to over spending in personal debt and business spending created

and encouraged speculative bubble asset bubbles growth  .

    These models improve current 30 year old  reactive inflation models and  probabilistic, statistical CAPM  asset pricing and Monte Carlo default simulation, oversimplified macroeconomic, inflation, interest rates, currency, commodities, mortgage bond spread, hedge fund,  real estate asset prices, avoided trillion dollars loss due to betting on the wrong side of credit derivatives, speculation over the business, economic news resulted past , current mortgages loan default and stock market crash.  

  

Development and implementation proactive, structural dynamic macro economic systemic risks simulation


Huang started applied moon land guidance and control tracking daily US Wall Street  technical analysis activities and  classical probabilistic, statistical global  macroeconomic growth and financial markets asset prices dynamics simulation (including normal stable continuous and crisis discontinuous data ) in 1972 .  He beginning develop, implemented  thousands of knowledge based proactive, structural  China, US, Taiwan, EURO, European, Asian Pacific, Russia, South America central banks monetary policy and financial markets asset prices simulators beginning 1983 , patented  proactive structural, dynamic OSA oil, petrochemical pricing mechanism models on Oil & Gas Journal, circulating to 80 countries , integrating macro and financial econometrics, industrial supply, demand , pricing theory into artificial Intelligence neural net, fuzzy logic, chaos algorithms out of last 20 years lMF statistics and daily US, Asian, European Wall Street Journals and Taiwan, China, Hong Kong's daily oil trading data, financial markets news , trading and corporate earning data(including normal stable continuous and discontinuous crisis data) combined with training and feedback from workshops and daily lectures to 30 millions China, Taiwan 15 cities TV, radio investors, banking, finance, real estate CEO, CFO, managers, traders, investors market psychology  and his lectures to 24 global central bank governors and financial engineering, financial risk management , corporate governance conferences (including China Peoples Banks governor Dai in Macao May 1999 and  Taiwan, Japan ,  ASEAN, US, Europeans  central bank governors) integrated into the  Neoclassic synthesis  and   Milton Friedman demand side monetary economic theory. It pinpoints each financial market crisis one to three months ahead by simulating the global central bankers daily financial market operations and it's impact on macro economic GNP, inflation and trade economics, commodities, industrial raw materials, products demand and prices, financial economics interest rates, currency exchange rates and corporate operating margins, US, European, Russia, South America stocks and bonds, commodities, financial futures and derivatives (call/put option, warrants), real estate properties prices, MBS, ABS structural finance products  prices hedging fund strategy.  These simulators tracking, forecast systemic and specific risks in central banks, government policy, trillions dollars global financial institutions credit , mortgage loan, hedge fund default  risks due to poor credit rating simulation in Asian crisis investment, resulted bad debt, trillions dollars equity markets trading loses and NPL, corporate scandals due to betting on the wrong side of financial markets investments (interest rates, currency, stock, bond, financial future, derivative and corporate merger/acquisitions and investment, procurement, market shares risks..
  These systems extended US Fed FRB/US and FRB/Global models to  monetary policy , macroeconomic control  and its impact  on  portfolio, housing, commodities assets  prices, interest rate, bond spread, currency and derivatives prices level, provide direct tracking of global monetary policy, oil prices impact on interest, currency, commodities, stocks, bond, and its derivatives prices)

 

Global Developed and Emerging Markets Economy, Finance, Futures, Derivatives, Housing Markets behavior Information Knowledge Base Development.


Huang has trained hundreds students collecting last 25 year global daily, monthly, quarterly  economics, financial markets trading data resources,(including crisis data) using models based data mining strategy, with one single equation covering 20 year’s data from emerging economy China/Taiwan ,and developed market US daily economic newspapers, U.S, Asian, and European Wall Street Journal, Business Week Economist,  IMF,  www.bloomberg.com daily economic, finance capital, futures, real estate markets,  daily trading data, financial statements, corporate governance scandals behavior data base; Asian, US, European markets 20 industrial sectors crude oil, refining  upstream/ downstream, real estate upstream/downstream 5000 products demand, prices  data, and major countries  monetary, fiscal policy, corporate/ plant reactors, recovery energy conservation design, supply demand chain operating history ( normal, emergency operation profit margin, stocks prices ); market, investors behavior sentiment data, analysis.

Proactive Structural Global Macro Economy, Capital Market Securities, , Housing Prices Bubbles Behavior, Market Forces Mechanism OSA models Simulation,  
  
  He pioneered, extended APOLLO moon landing guidance and control AI  fuzzy logic, neural network, chaos theory based expert systems into global macro, financial, industrial, trade economic , demand and securities, derivatives , housing price bubble mechanism theory and  5000 products supply, demand, market forces mechanism,  improve current  supply side monetary  economics, asset prices theories.  He pioneered two master hands controlling global macro economics, capital markets equities, bond, commodities, housing assets prices through thousands proactive structural, dynamic, cause, response models simulate , forecast last 20 years global developed (US and EU, Japan) and emerging markets (Russian, China, Asian Pacific, S. American) central banks proactive monetary, economic, fiscal policy impact on macro economy, daily financial, IT stocks, stock indices, bond, currency, commodity cash and futures, derivatives markets, real estate asset prices, Basel II credit, market, operational risks early warning, 20 industrial sectors 5000 products demand, prices, market forces mechanism with average error below 1.5 %, correlation constant above 0.92.
  The following simulators tracking, forecast months, years ahead the causes, onset, spread, recovery and early warning systems of last 20 years global developed, emerging economy GDP growth, boom and bust recession cycles, inflation, and capital markets financial currency, energy, equities, housing, IT asset  prices bubble burst crisis speculation, following the crowd behavior resulted asset prices bubbles and associated default, nonperformance loan, corporate scandals behavior finance simulation,  forecast inflation, interest rates and rate hikes resulted US stock market 1987 crash impact on Asian, European markets, 1990 Japan stocks, housing asset price bubble burst, 1992 European currency crisis cross country spillover, 1994 China runaway inflation, macroeconomic control, stock market crash, 1996  soft landing and rate cuts resulted bull market rally. Securities, derivatives markets boom and bust of 1997 Asian financial , currency crisis, 1980, 1990, 2000, 2004-current housing price slump resulted economic recession continue into summer 2008, energy crisis,  and US 2000 IT asset bubble burst. spread into Asian, European markets.    He accurately predicted again on Nov. 2003 Euro-events Asian/China Finance, Capital Market Conferences Singapore, Shanghai, Beijing that US and global excessive rate cuts resulted stocks and housing bubbles led to rate hike in 2004 summer,   China Peoples Bank rate hikes credit tightening macroeconomic control to cool off overheated housing, auto markets will continue through 2006, stock market entering bear market with Shanghai index plunge from 1800 to 1000, US excessive consumer, business demand drive soaring record oil, metal  price and inflation. Fed will beginning 17 rate hikes series June 2004 through 2006 resulted US sub-prime housing markets bubble burst , housing starts and home sales plunged 40 % from Jan 2006 till July 2007. He warned on Dec. 2006 Taiwan University global finance conference and June 2007, Peking University risk management conference that US Fed  stop rate hike summer 2006, lead to financial market speculation on rate cuts, betting on the wrong side of interest rates , m2 money supply growth  soared from 3 % to 6.2 %, lead to US and China stock market and housing market bubbles resulted July  oil price soared to 80 and  Aug. 2007 trillion dollar housing and stock market loss in sub-prime mortgage loan default and stock markets correction. However markets speculation on rate cuts led to  40 % gain on Dow Jones, NASDAQ resulted wealth gain drive jumbo high priced housing bubble 40 % higher, will lead to eventual bubble burst and US economic recession next year.
He predicted again on Feb 23, 2005  and Nov. 18, 2005 to 250 global oil, gas, banking , securities industries CEO, senior executives in China Natural Gas and Oil Markets Conference Beijing strategic risk management workshop in Beijing recommended oil, energy, metal futures, derivatives soared 1000%  that oil price will break 55 in March and challenge 63 in spring 2005 and to 69 in January  78, in  July 2006 and repeat in  summer 2007, He use the following CPI inflation,  mortgage default and Shangahi Shenzhen 300 proactive structural dynamic simulations predicted, warned on Sept 19,2007 Wall Street Journal energy , market beat, real time economics that  US Fed rate cuts to save sub-prime crisis will do little to stop housing price slump continue into summer 2008, drag economic into recession, at the cost drag dollar lower to 1.50 Euro and 106 Yen, drive oil price to 100 and gold price above 850, inflation, interest rate up, falling dollar, drag global stocks following US stocks into bear market correction, repeating 1980, 1990, 2000 inflationary recession.