Self-fulfilling Mechanism Of Financial Crisis And Prevention

With the deepening of economic and financial globalization and integration,the fluctuation correlation of the major price signals in the world,countries or regions have been strengthened,which would cause financial crises.At the same time,driven by some historical financial crisis events,the theory of financial crisis has got a great progress.It has formed four generations of financial crisis theories and provided theoretical foundation for t financial crisis prevention policy and regulation.Based on the financial crisis experience in recent years,the economic fundamentals in countries or regions do not deteriorate before or at the beginning of financial crisis.Therefore,the theories of financial crisis which based on "substantial" channel are appropriate ro the outbreak mechanism of the financial crisis.The "self-fulfilling" theory which focuses on the "pure" channel but does not ignore the "substantial" channel considers financial crisis as a mutual reinforcement mechanism between the agents' expectation changing and the economic fundamentals deteriorating so can effectively explain the crisis outbreak and contagion mechanism without economic fundamentals deteriorated.Although the global game breaks through the hypothesis of the agents' sufficient information and can obtain a unique equilibrium under certain conditions,the existing literature oversimplified the definition of the assets return functions and would meet difficulties for solving model if the agents were heterogeneous.Therefore,this paper will carry out further research on the financial crisis self-fulfilling in the basis of the current research results,and the main content is as follows:In this paper,based on two kinds of assets with different income structures,we would build a general homogeneious financial crisis self-fulfilling model and discuss the characteristics of the equilibrium solution by global game which can obtain a unique equilibrium and is favorable to explain the mechanism of financial crisis in incomplete information environment.Firstly,we will generate the common characteristics of financial asset returns in reality and constructs two types of assets,fixed income and non-fixed income asset.The return of non-fixed income assets is a function of the capital supply scale and market depth.Secondly,based on the above two types of financial assets,the homogeneous financial crisis self-fulfilling model under the prior and posterior distribution will be constructed respectively and derive the unique strategy surviving iterated deletion of strictly interim-dominated solution at the agents' strategy threshold.Finally,the dynamic relationship between the main variables and the equilibrium in the model and the conditions of unique equilibrium solution will be discussed.The conclusions are that:(1)the financial crisis self-fulfilling model with prior and posterior distribution has the strategy surviving iterated deletion of strictly interim-dominated solution;(2)the equilibrium solution under the posterior distribution is positive correlation to the market depth of non-fixed income asset,the normal return and residual value of fixed income asset;(3)the financial crisis self-fulfilling model always has a unique equilibrium no matter what the relative accuracy of fundamental information and agents' private information is.We will bulid a financial crisis self-fulfilling model with heterogeneous payment and noise structure of private signal and derive the unique strategy surviving iterated deletion of strictly interim-dominated solution and discuss the uniqueness and monotonicity of the equilibrium solution.Firstly,we will define the characteristics of financial market and get some basic assumptions with heterogeneous assets payment structure and noise distribution of private information.Secondly,the inference will be proved that the weighted mean of agents' strategy beliefs is Laplace's belief by introducing agents' virtual private signals and random sampling method.Thirdly,derive the unique strategy surviving iterated deletion of strictly interim-dominated solution,and discuss the uniqueness and monotonicity of the equilibrium solution.Finally,based on the above modeling ideas and equilibrium solution,the bank run crisis,currency crisis and sovereign debt crisis self-fulfilling model will be constructed respectively.The conclusion shows that:(1)the weighted mean of agent strategy beliefs is Laplace's belief no matter what kind of information noise distribution which an agent will estimate the probability of other agents' decision-making behavior of other subjects with.(2)The crisis self-fulfilling model only has a strategy surviving iterated deletion of strictly interim-dominated solution at the strategy threshold and the equilibrium solution of the model is monotonous.(3)The heterogeneous bank run crisis,currency crisis and sovereign debt crisis self-fulfilling models are constructed respectively and the equilibrium solutions of these models are unique.Based on two kinds of financial crisis self-fulfilling models and their equilibrium solutions,we will introduce policy control variables into the models and discusse the policy regulation effect to financial crisis self-fulfilling.The conclusion shows that :(1)the effective change and scope of policy regulation depend on the relative accuracy of public information and agents' private information about fixed income assets and the multiplier of policy regulation in the asset price crisis.(2)if the total cost of compensation is ignored,the risk of bank runs is negative to compensation limit and the number of long-term deposit holders who have the same compensation limit as short-term deposit holders.However,given the total cost of compensation,there are two incompatible strategy spaces that a certen type deposit,with sufficiently high compensation limit,whose number is less than other type can lead risk of bank runs down or else increasing compensation limit of long-term deposit will be attractive.Moreover,the conclusion indicates yet that the "fairness" and "efficiency" could not be satisfying simultaneously by adjusting the compensation limit.(3)the effect of Rreducing the probability of currency crisis by increasing the cost of speculators' short selling will depend on the relative distance between current exchange rate and shadow exchange rate.Similarly,the relationship between foreign exchange reserve and currency crisis is subject to the economic basic state of host country.(4)the risk-free interest rate in the international financial market has no significant impact on the probability of sovereign debt crisis,but reducing the reinvestment rate and debt credit can effectively reduce the sovereign debt risk.