The Speculative Attacks, Financial Fragility And Financial Risk Management

A series of financial crises have broken out in many countries around the world ever since the latter half of the20th century. The reasons causing the financial crisis and the forms have also changed a lot. Especially, the American subprime crisis in2007has caused a global financial crisis which makes all the nations suffer. The severe turbulence of the world economy has induced a widespread research studying causes and prevention of financial crisis and the relationship between virtual economy and substantial economy. Among all these researches, there is a widely believed idea that the financial crisis has its own fragility intensified by the globalization, liberalization and innovation of finance that enormously facilitate the economic development in this contemporary age. The endogenous characteristics of the fragility lead to the liability of financial speculative attacks and contagious spread of crisis which in turn worsen the stability of states’ financial system. Thus, a vicious circle is formed. Managing economic exposure on the basis of financial risk management has become a primary goal in the countries’ macroeconomic management.Based on the related theories at home and abroad and empirical researches, this thesis will focus on the financial fragility, financial speculative attacks and financial contagion. Firstly, the third generation model of monetary crisis will be combed, generalized and summarized, and then it will be evaluated and extended. Main theories of traditional credit market include:Financial Instability Hypothesis of Minsky, Security Boundary Hypothesis of Craig, Bank’s Pro-cyclical Behavior Theory, Bank Run Theory as well as Financial Fragility Model of Allen and Gale. Fragility study in financial market mainly aims at asset price fluctuation and the linkage effect, including asset price fluctuation theory, Sticky-Price Monetary Approach, theories related to price fluctuation and financial contagion channel theory.Secondly, this paper settles and summarizes three-generation theoretical model of monetary crisis, effectively expounds and evaluates it, on this account deeply discusses microcosmic effect mechanism and macroscopic contagion model for monetary crisis. Monetary crisis theoretical model has experienced mainly three-generation development. The first generation of models is non-resistance policy and resistance policy models developed by Krugman (1979). It considers the deterioration of basic macroscopic factor is the main cause of monetary crisis; the second generation is stage condition policy model developed by Obstfeld (1994,1996,1997). It considers the precipitating factor of monetary crisis is mainly the expected factor; the third generation of models is represented by ethical risk model, security portfolio investment capital crisis model and herd model. They unscramble monetary crisis from microcosmic perspective. As for microcosmic effect mechanism of monetary crisis, this paper expands the model of Mendoza et al.(2009), adds structured financing institution and analyzes how financial sector transfers financial risk to other microcosmic bodies and how it acts when the balance sheet changes drastically. Meanwhile, this paper explains macroscopic contagion mechanism of monetary crisis through a simple two-country model.Thirdly, in a bid to systematically judge the degree of Chinese financial fragility, the intervals of Chinese financial fragility are discriminated. According to the development characteristics of China’s financial system, current situations of current finance industry as well as relevant financial indexes and data, this paper adopts three indexes to investigate financial fragility, including year-on-year growth of total deposit in banking system, year-on-year growth of total loan in banking system and loan-to-deposit ratio. Then, factor analysis method is used to draw principal components of the above three indexes. Finally, weighted index method is adopted to construct financial fragility index. The result shows recently, China’s financial fragility index has exceeded the warning line. Based on this, this paper investigates the impact effect of financial fragility on main variables of China’s macro-economy. Impulse response curve is drawn through constructing vector auto-regression models of three variables (including year-on-year growth of practical GDP. inflation rate and financial fragility index) and calculating impulse response function. In addition, to reflect the influence stability of financial fragility index on year-on-year growth of practical GDP and inflation rate, we also calculate the standard deviation of impulse response curve by Monte Carlo simulation method and draw impulse response curve again. The result shows the standard deviation of impulse response curve calculated by analytical method has not significant difference with that calculated by Monte Carlo simulation method.Fourthly, to explain financial speculation behavior in macro-economy, this paper adopts research thoughts of Daniel (2001), Corsetti and Mackowiak (2006) as well as Burnsideet al.(2001,2006), regarding the monetary crisis incurred by financial speculation attack as the result of the failure to coordinate monetary policy and financial policy. On this account, an open economic model with policy transfer is constructed, and the causes of the collapse of fixed exchange rate system are explained so as to provide some theoretical perspectives and empirical evidence for measurement and management of national economic risks. In the model analysis, we can find when positive monetary policy is adopted, open economic model adopts fixed exchange rate system; however, when the way of economic policy mix is changed, fixed exchange rate system will be forced to change to floating exchange rate system and the nominal interest rate will rise sharply; besides, national bonds scale increases rapidly; the nominal interest rate inflates therewith; accelerated inflation occurs; thus monetary crisis is caused.Fifthly, main paths for financial contagion include three. This paper takes American stock market and stocks markets of7Asian countries for examples and applies DCC-GARCH model to discuss and test the third financial contagion channel under open economy (i.e. financial contagion among financial sectors of different countries) and to study dynamic correlation of financial contagion on international stock market. The result of this paper shows conditional correlation coefficients of each stock market have significant increase; financial contagion phenomenon is especially remarkable in2007-2009(during financial crisis). It can be found through comparing dynamic correlation coefficients of financial contagion and conditional correlation coefficients "under normal state" during three stages of financial crisis, during financial crisis, the fluctuation in American stock market plays a more important role in the correlation of the two.Finally, this paper from systematic perspective establishes VAR model including difference sequence of GDP growth rate, CPI growth rate, M2growth rate and yield growth rate in stock value as well as financial fragility index. The result of linking financial fragility, financial deepening and economic growth shows, financial deepening imposes negative influence on economic growth in a short time, but will produce positive influence on economic growth in a long term. Furthermore, positive impact of economic growth will have long-term positive influence on financial fragility; positive impact of CPI influences financial fragility first positively and then negatively, with gradual convergence; positive impact of M2growth rate has continuous negative influence on financial fragility.