Research On Financial Risk Contagion

It is well known that there always are many unexpected risk events in international economic activities.The international financial markets integration makes the relationship between international capital markets more and more closely,and meantime increase the risk contagion between financial markets in different countries(regions).Along with the chain reaction of these risk events,the asset prices in different countries(regions)tend to show significant jumps at the same time or successively.A large number of studies have shown that the jumps of asset prices generally has the characteristics of self-excitation and cross-excitation.The self-excitation means that the occurrence of a jump in the market tend to be followed by more jumps in the same region,while cross-excitation refers to a jump in one market will spread to other market,raising the probability of future jumps in other market.Based on a new model known as Hawkes process which is proved to be a good description of the asset price jump characteristics,this paper investigates the risk contagion between China’s stock/foreign exchange markets and other countries(regions)by estimating the model correlation of different asset price jumps.The details are as follows:First,based on the univariate Hawkes jump-diffusion model,we study theself-excitation effect in time series of jumps.Using the Shanghai composite index and the S&P 500 index data,we investigate the frequency of jumping,the size of the self-excitation and analysis the events that may cause continuous jump.The empirical results confirm that the jumps is clustering,and most likely to fluctuate during the financial crisis,the adjustment of the stamp duty,the adjustment of the deposit reserve ratio and the promulgation of important laws and regulations will also lead to the continuous fluctuation of the jumps.Second,based on the bivariate Hawkes jump-diffusion model,the self-excitation of the jumps in the time series and the cross-excitation in the spatial sense were studied.Using data of the stock market in China,the United States and Hong Kong,this paper mainly studies the risk contagion between these market in the past 20 years.The empirical research includes the trend of time-varying jump intensity,the contagion effect under the situation of both collapse and soar,the change of contagion effect in different stages with QFII,QDII,SH-HK stock connect are cut-off points.The empirical results show that the cross-excitation effect between China,the United States and Hong Kong stock market are more and more significant with the advancement of capital market opening and the contagion from the United States to China is more remarkable.Since 2014,China’s economic fundamentals,the cross-excitation effect between the United States and China has weakened due to departure in Economic fundamentals of two countries.Last,the risk of crash is more contagious than the risk of soar.Third,based on the Hawkes jump-diffusion model,we also studies the contagion effects of different assets markets in China.The empirical results show that the return of the Shanghai Composite Index and foreign exchange rate are both self-excited,and there is a one-way contagion effect of from stock market to the foreign exchange market.The main contributions of this paper are as follows:First,the financial market is a complex nonlinear system,the extant literature using static correlation or dynamic correlation can only describe the linear relationship between financial markets,and cannot describe its nonlinear relationship.The research method used in this paper is not limited to linear correlation and can quantitatively measure both the direction and size of risk contagions.In addition,the Hawkes jump-diffusion model itself has economic meaning and can be used in the pricing of the portfolio and the pricing of the derivative product.Second,most of the literatures are setting in advance of the crisis occurred,but the contagion does not necessarily occur only in the crisis,pre-set it is easy to ignore the stock market in the normal period of infection,this paper assumes that the infection can occur at any time during the sample period and thus study the contagion effect continuously and dynamically.Third,time-varying jump intensity can be used as a market pressure indicator,the trend is similar to the VIX index which reflects stock market volatility and market fear.The jump strength increases rapidly during the time of market crash,thus can be used to measure the market crash and market fear,also can be used as a market reversal signal.