Risk Simulation, Measurement And Warning Of Government Debt Financing

Goverment debt, as the tool of government's economic management, plays an important role in modern economic activities. Debt is an important source of government income, which makes up fiscal deficits, raise funds for construction and ensure people's needs. It connects with the financing costs, risks and national finance security whether government financing is scientific, timely and reasonable. The key point of government financing decision-making is to reduce the cost of interest payments, control cost risk and prevent the debt crisis. The difficulty in debt financing is that government can not have both low costs and low risks. The portfolios with lower interest costs are often faced with large uncertainty. The portfolios with small risk often have high interest payments. How can the government make a trade-off between cost and risk, to set up scientific and reasonable financing portfolios, is a significant problem to be solved.Risk simulaton and risk measures are new ideas to deal with the trade-off between costs and risk. The reason why risk problems are boring is we usally cannot identify sources of risk and measure the risk. To resolve the problem, this study use mathematical model to make risk environment of government financing, simulate changes of risk factors by computer technology, proposed the numerical method to measure risk probability with non-parametric distribution estimation. First, we design a risk simulation system. Markov Chain Monte Carlo is used to simulate macroeconomic state changes. In this process, we calculate the probability of economic expansion and contraction. Stochastic model is used to simulate dynamic of term structure of interest rate. Second, we propose numerical methods to measure risk of costs and assesement to target portofolios. Based on simulation samples, we set an optimaziton model to look for the best portfolios that minimize costs under risk tolerance of government. Non-parametric statistics is used to estimate the distribution of simulation samples. Then, a new numerical method to measure risk is to be propesed. This technology can establish characteristics of cost-risk under any financing portfolios. It also can be applicated in comparative analysis of the various financing portofolios and stress testing.Government debt financing, as a public service, has beginnings and ends. If debt portpolios make-desition is the middle part, the issue of debt is beginnings and the payment of debt is ends. With the perspective of economics, we analyzed motivation of government debt issuing, study the economic function and mechanism of government financing, proposed the criteria for judging the issurance time, present a cost-benefit method of judging payment time. Against default risk, this study provides a new idea of early warning of risk probability. We measure the probability that risk indicators exceeded the warning level to monitor debt risk, set warning signals to visually show performance of the overall or part risk of debt.This study is a new try for government to use mathematics and computer technology to improve debt management. We present the methods of risk simulation, risk measurement, risk warning in government financing make-decision, highlighting multi-disciplinary, quantitative characteristics and operation. Of course, any model or method is only support tool for decision, not replace practical experience and judgments of debt manager. We hope this study can be helpful to establishment of the Chinnese debt policy laboratory in the coming future.