Guard Against Macro Financial Risk And Research Of Early Warning Index

During the past several decades, accompanying with the acceleration of economic globalization and financial liberalization, the spread of financial risks and financial crisises emerge more frequently. There is an obvious extensive and deepening tendency of the crisises. The outbreak of financial crisis, triggered by some factor, is a systematic emission of the financial risks after it accumulate in some extension. The loss and influence of the crisis on the country’s financial system and economic development is profound, it costs the country several years to rebuild the economic and financial order and put the economic development back on track.Although the issue of financial stability and safety receives more attention, until now, there is no agreement about the definition of financial stability in theoretical circles. There isn’t an uniform framework to measure and predict the macro financial risks, also the compatible policy instruments. Based on the previous research, the author applies the financial engineering theory and financial accelerator theory to measurement and management of macro financial risks. The author tries to use econometric approach for integrating the structural index and obtain an early warning index of macro financial risks, finally explore a new idea to predict and quantify the macro financial risks. Besides, the author also amends the original model to make the result more convincing and uses the approach of stress test to simulate the influence of external shocks on the result. Finally the endogenesis and exogenesis of the macro financial risks are in an integrated framework.The main contents of this article are as follows:The first chapter reviews recent research about definition of macro financial risks and financial stability, origin of financial fragility, theory of financial crisis, quantitative research of financial risks. It mainly concerns about the transition of micro financial stability to macro financial stability, the endogenesis and exogenesis of financial fragility, the trigger mechanism of financial crisis, the sort of quantitative approach. Finally the author makes a conclusion by his own analytic framework. The second chapter introduces present quantitative research about the macro financial risks and financial stability by groups. It is mainly about four catalogs:index approach, econometrics approach, market information approach, VaR approach.The third chapter introduces the academic foundation of this article----financial accelerator theory and contingent claim approach in details. They pave the way for the constructing of EWI in next section.The fourth chapter uses Logit Model to integrate the indices of distance to default and constructs a financial crisis EWI. The EWI is constructed by samples of Korean data and the result shows that the model is predictable to Asian countries’ macro financial risks and financial crisis.The fifth chapter concerns about the relationship of asset bubbles and financial crisis. Because the author doesn’t consider the asset bubbles, the CCA bias the estimation. The author utilizes the latest research findings and proposes a revise to the CCA. Then the author finds that the macro financial risks index generated by the revised model is smoother and more forward-looking in predicting financial crisis.The sixth chapter introduces the approach of stress tests. Because this article focus on the endogenesis of macro financial risks in previous section, in this chapter, the author uses stress tests to make up this deficiency and does a simple empirical research.The seventh chapter, based on the previous research, proposes a comprehensive framework to manage the macro financial risks. It includes three layers which are micro, semi-macro, macro and a great variety of instruments.To sum up, the article constructs a comprehensive analytic framework and unites to an organic integer in four ways including identification, measurement, prediction and management of the macro financial risks.The article makes some good conclusions from the framework:The distance to default of financial section and enterprise section is indicative to macro financial risk. There are more fine properties of the index after eliminate the asset bubbles than before and it is more predictable to macro financial risk. Stress test makes a welcome addition to the analysis using the model because it can analyze the external shocks. The author hopes the work already done will bring new insight to the regulators and researchers of the macro financial risks. More important, it can lead to more consideration about the macro financial risk research.