Chinese Financial Market Risk Identification and Policy Impact in New Time Period

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Journal of Central University of Finance & Economics ›› 2018, Vol. 0 ›› Issue (11) : 24-37.

ZHU Sha, PEI Pei

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Abstract

This paper aims at constructing financial market stress index and its submarket indices particularly for Chinese market in the new period. To do that, it modifies the IMF's current construction method of financial stress index, and also delicately chooses its component risk indicators that can accurately represent the risks of banking, securities and foreign exchange markets in China. This paper uses the data from January 2007 to December 2016, and divides it into three sub-periods which are the global financial crisis, post-crisis era, and new normal period. By employing the constructed index, this paper identifies the extremely high-risk events in the Chinese financial system. Using the Markov Switching Model, this paper also distinguishes the two regimes of the financial markets. In addition, it's the first time in Chinese literature that the increasing of Chinese economic policy uncertainty (EPU) under the new period has been studied from the perspective of financial market risk. Empirical results show that there is a Granger causality between China's financial markets risk and EPU; the government tends to issue more new economic policies with the stimulation of financial pressure through the banking, securities, and foreign exchange markets; the impact of high-stressed risk state on EPU is more rapid and lasts longer than that of low-stressed risk state.

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Financial market risk / Financial stress / Economic policy uncertainty / MSAR model

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ZHU Sha, PEI Pei. Chinese Financial Market Risk Identification and Policy Impact in New Time Period[J]. Journal of Central University of Finance & Economics, 2018, 0(11): 24-37

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