Asset Price Volatility And Financial Stability

Along with the development of capital market, the amounts and proportion of financial assets to the economy also increase constantly. By the end of November in 2010, total assets of China's banking financial institutions had broken through 92 trillion yuan, with 106 securities companies over 2.24 trillion yuan,62 fund companies'management assets exceeding 251 trillion yuan, and insurance companies 490 trillion yuan. This means that the total assets amount of banking, securities, insurance and fund industry has breached the mark of 100 trillion yuan to 101.65 trillion. And on January 20,2011, China's national bureau of statistics published GDP preliminary statistics throughout the year of 2010 that national GDP is 397893 billion yuan and financial assets for 255.47% of GDP. This shows that the amount of financial assets were significantly higher than GDP, which has reached more than 2.5 times of it. So, asset price fluctuations, especially the great fluctuations will definitely affect the stability of financial. It has become an increasingly concerned key topic for the academic researchers, policy makers and market participants to pay attention to.Since 2007, global financial crisis triggered by the subprime mortgage crisis has caused turmoil to the world economy. Large-scale outbreaks of financial crisis forced every county's central bank to take various measures to salvage financial crises. At the same time, financial stability becomes the very period target for central banks to focus on, which again aroused widespread concern. Financial instability period often accompanies with the assets price fluctuation which does not necessarily mean financial instability. However, the excessive fluctuation will transfer unstable information to the market participants, which may cause the panic of investors, financial institutions or financial market, and result in the keep falling of asset prices and financial instability. During the financial crisis, biggest fall of the three big stock index:the Dow Jones industrial average index, the Nasdaq composite index and the standard &poor's 500 index is respectively 53.54%,55.63% and 56.68%, which are all more than 50%. They bring financial markets with the huge impact, also aggravate the financial instability. So, the research of asset prices and financial stability problem has important theoretical and realistic significance.Based on the summary of related concepts of asset prices and financial stability and relevant literature, take financial stability as the research target and asset prices as the research focus, this paper studies and analyses the theory and characteristics of assets prices fluctuation from macro and micro perspective, then researches channels and ways of asset prices'influence on the financial stability and focus on the different levels of study on the influence of asset prices fluctuation on financial stability. This paper takes theoretical and empirical analysis on asset prices'influences on the banking sector stability, monetary policy as well as the stable exchange rate, and construct Chinese banking sector stability index in the traditional method by combining with China's data. Then, this paper successively analyzes the characteristic of financial instability triggered by the excessive asset price volatility based on represent variables of linkage of asset prices performance during the subprime crisis, economic status and monetary policy implementation, and puts forward several suggestions on how to maintain financial stability better in the condition of asset prices fluctuation. Finally, this article puts forward the conclusion of the paper and prospect.This paper mainly study asset prices and financial stability problem through nine chapters. First is the introduction, which introduces purpose and significance of this research, research status from domestic and abroad review, the thinking and methods, as well as research structure. Chapter 2 focuses on asset prices, explains and defines the related concepts and correlation of asset prices, asset pricing model, asset prices and asset price bubbles and others, and investigates the Chinese stock market price bubbles and bubble risk in conjunction with the relevant theories. Chapter 3 focuses on financial stability and introduces the theory of financial stability and evaluation system of financial stability on the basis of the definition of financial instability. Chapter 4 will combine asset prices and financial stability together to investigate, interprets and introduces the assets fluctuations financial stability mechanism from the perspective of wealth effect, investment effect, credit risk effect, the financial accelerator effect, monetary policy dilemmas and exchange rate fluctuations aspects. Chapter 5 emphatically investigates asset prices'influence on the bank system stability from the perspective of influence channels, measurement methods of the banking sector stability, calculation on Chinese banking system stability, assets restriction and the bank stability and bank income structure, and adopts the data of China to empirically analyze asset prices over the banking system stability. Chapter 6 analyzes the monetary policy's transfer from monetary targets to inflation targets, and again to financial stability, and compares inflation with financial stability condition index on the basic of estimation on China's financial stability condition index and trend. Through asset prices on the monetary policy transmission, asset prices and monetary policy reaction, this chapter emphatically investigates asset prices and monetary policy dilemmas, and empirically analyzes the asset prices and optimal monetary policy response by American relevant data. Chapter 7 emphasizes on the asset price volatility and exchange rate, foreign exchange rates and financial stability two aspects, empirically analyze the asset prices'influence on exchange rate from international oil prices on the RMB impact angle and the influence of exchange rate fluctuations on financial stability based on the performance of exchange rate fluctuations on monetary substitution. Chapter 8, through the relationship of assets price trends during subprime mortgage crisis period such as the stock index, crude oil prices, GDP growth rate and CPI witch representatives of macro economic variables, and interest-rate and currency supply witch representatives of monetary policy variables, analyzes the characteristic of financial instability triggered by the excessive asset price volatility and puts forward several suggestions on how to maintain financial stability better in the condition of asset prices fluctuation. Chapter 9 is the conclusion and prospect of the paper with a brief summary of the whole article, which put forward the disadvantages and problems remains to be further researched.This paper mainly combines qualitative analysis and quantitative analysis, empirical analysis and normative analysis to discuss the issue of the asset price volatility and financial stability. This paper not only confined to the theoretical analysis, also made a lot of empirical research. In order to test problems of asset prices and the bank system stability, asset prices and monetary policy dynamic, asset prices and the stable exchange rate and so on, this article collects and selects a lot of time series data of China and the United States, using Spss and Eviews research tools, adopting VAR model, the state space model, autoregressive distributed lag model (ARDL) research methods to examine the connection and effects of relevant variables. It combines empirical analysis results and puts forward related conclusions and countermeasures. Thus, the problem analysis and empirical research are combined effectively and the article's theoretical foundation and practical significance are enhanced. The research results and policy recommendations can be a reference for policy makers.