Market risk versus credit risk of the selected countries in the Trans-Pacific partnership agreement

Abstract

At the time this study is finalized, the future of the so-called Trans-Pacific Partnership Agreement (TPP) is still uncertain after the US Present Donald Trump walked away from his predecessor Barack Obama’s commitment. A different version of TPP, or to be called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), may be formed without the US presence. Among these member countries, Vietnam and Malaysia (in the ASEAN), together with Australia and New Zealand, in the Pacific Ocean, are generally considered closely competitive nations for various industries, in particular for Agriculture; Food and Beverage and Tourism. This study is conducted to measure and rank the market risk level of 10 industries/sectors for selected courtiers in the Asia Pacific region: Vietnam, Malaysia, Australia and New Zealand. Two periods are considered in market risk, including: (i) the GFC period (2007-2009); and (ii) the post-GFC period (2010-2016). The market risk level is measured using the parametric approach and the historical approach for both Value at Risk (VaR), the potential losses in the future over the given time period (day or month) at a given confidential level, and Conditional Value at Risk (CVaR), which is designed to estimate the risk of extreme loss. Findings from this study confirm that Vietnamese sectors are relatively riskier than their counterparts in Malaysia, Australia and New Zealand. In addition, market risk level across sectors in all countries has substantially reduced in the post-GFC period. Financials including Banks, Diversified Financials, and Insurance have been largely ignored from the Vietnamese Government’s focus. Interestingly, IT industry is considered very low risk in Vietnam whereas this sector belongs to a group of high market risk in Malaysia, Australia, and New Zealand. This study is then extended to measure and rank the credit risk level for all industries for Vietnam as the case study. Credit risk is generally defined as the risk that is determined on a credit requirement from the default. Findings from this empirical study indicate that Industrials, Energy and Consumer Discretionary sectors have had the worst ranking performance in relation to their credit risk. Utilities, Financials and IT have achieved a substantial improvement in the post-post GFC periods. In addition, this study also ii demonstrated an important link between market risk and credit risk, which can provide an important insight to develop for further issues integrating these aspects. With the ambition to be a financial hub in the Asia Pacific region in the regional integration and a modern industrial economy, a shift of the attention to this particular and important sector in Vietnam is the near future is strongly recommended.