Mean-reversion,Market Efficient Cycle And Systemic Risks

Systemic risks are related to financial stability,economic stability,and national security.Research on the prevention and resolution of systemic risks has been not only a major issue in China's financial academic studies in recent years,but also a major national demand owning to its significant theoretical and practical value.The report of the Nineteenth National Congress clearly pointed out that "maintaining a sound financial supervision system and guarding the bottom line where systemic risks do not occur" is a clear goal to the prevention and resolution of systemic risks in financial markets,a fundamental requirement for further economic development,and a financial basis for a stable development of society.Among all markets of the financial system,stock market is known as the "barometer" of the macro-economy,where the outbreak of systemic risks will do great damange to the entire financial system and economic development.China's stock market has expanded greatly in size,standing amongst world's major markets merely 30 years after its establishment,a passage taking many developed countries more than 200 years to travel.Indubitably,the market's rapid growth presents an impressive achievement,however,it is also the cause of its instability and inefficiency.Excessive and irrational speculation due to the high proportion of individual investors,China's stock market is sensitive to changes in the economic environment and abnormal price fluctuations,affecting the stability of the stock market and triggering systemic risks.As consciquence,supervision over systemic risks in the stock market protects economic development from the impact of malfunction of financial system.Therefore,this dissertation researches on China's stock market to study the accumulation and release of systemic risks in purpose of proposing polical recommendations for the prevention and resolution of risks.An efficient stock market can provide financial support to economy and improve the efficiency of allocation of resources.On contrary,an inefficient market will create a "financial cellar" that will hold capital within financial market,in which case high leverage causes the accumulation of capital bubbles,and abnormal fluctuations in capital prices triggers systemic risks and even financial crisis.Financial crisis is the extreme form of market inefficiency,and the emergence of systemic risk is the "regular"form,thus improving market efficiency is the basis for preventing systemic risks.However,there exists fundamental disputes regarding to the notion of market efficiency in academic realm:the dual dilemma between the theory of standard finance and behavioral finance,between theoretical and practical financial studies resulting in a lack of theoretical foundation of studying systemic risks from the perspective of efficient market.Under this circumstance,the market efficient cycle theory is invited by this dissertation to resolve the dual dilemma.From this innovative perspective,this dissertation proves the existence of market efficient cycle and study the accumulating and releasing process of systemic risks,with emprirical tests of mean-reversion,providing an theoretical and practical foundation for financial regulator.This dissertation is constructed as followsFirst,this dissertation summerizes relevant theories and studies of systemic risks,analyzes the correlation between market efficiency and risks,comprehensively elaborates on the formational and evolutional mechanism of systemic risk,and clarifies major concepts of systemic risks and market efficient cycle.Then,I analyze the characteristics of systemic risks and the causes of financial crisis outbreaks,forming basis for theoretical analysis and empirical testing.Besides,this dissertation finds that the existing literature has sufficient researches,theoretical and practical endeavors on systemic risks,but none concludes all aspects of the risks,regarding the formation mechanism,evolution mechanism,characteristics and measurement.This dissertation,through a thorough review and analysis of the existing literatures,finds that market inefficiency is the root of systemic risks,from which perspective,I explain in detail the formation and evolution of risks,in order to establish a solide theoretical foundation for the accumulation and release rate of risks,and synthetize the indicators for their measurement and supervisionSecondly,the theoretical studies of this dissertation researches on stock markets,and elaborate on the relation between mean-regression,market efficient cycle and systemic risks:the hypothesis of market efficient cycle serves as theoretical foundation,with which I rearch on systemic risks,using the empirical methods of mean-regression Systemic risks accumulates and releases within one efficient cycle:market inefficiency generates systemic risk,mean-aversion occurs on stock market;the returning to efficieny cause systemic risks to release,resulting in the mean-regression of prices.In this perspective,this dissertation establishes a theoretical basis for empirical studies of the formation,evolutional mechanism,characteristic,and measurement of systemic risks.The empirical studies of this dissertation are conducted in the following structure the existing proof of mean-regression and market efficient cycles on stock markets—the cyclic characteristic of market efficient cycles and systemic risks—the asymmetric characteristics of market efficient cycles and systemic risks.In the first empirical study,we intend to prove the existence of market efficient cycle with the classical model of mean-reversion.By testing price index with STAR model,I prove the existence of mean-reversion and market efficient cycle on world's major stock markets.Results show that on mature stock markets in developed countries such as the United States and the United Kingdom,the efficient cycles are shorter,which indicates that the overall market is more efficient,the time for mean-aversion is short,and the probability of systemic risks accumulation is low.However,the stock markets of developing countries such as China and India have longer efficient cycles,which in turns indicates that the market is less efficient.The process of mean-aversion is more likely to occur in these markets,along with high possibility of risks accumulation,which may results in financial crisis.After proving the market efficient cycle on stock markets,by examining existing literatures,I find that the cyclical characteristics of systemic risks are derived from the stock market's overreaction to economic fluctuations.Thus the second part of empirical studies analyzes the cyclical features of systemic risks from the perspective of investors,firms and stock market,which driven by the deviation and return of market efficiency,improve the predictability of financial crises.This dissertation describes the cyclical features of systemic risks by synthesizing market pressure indicators and applying Markov system transfer models and R/S method.The results show that the systemic risks of China's capital market alternates between two regimes and that obvious tracks of negative feedback occur in its cyclically.The short cycle of China's stock market and low level of risks indicates that the market's efficiency has gradually improved,and the risks will fully release after short accumulationThe speed of release of systemic risks determines whether systemic risks grow into financial crisis:the asymmetrical feature of systemic risk known as slow accumulation and rapid release" triggers the out-burst of financial crisis.In order to observe more intuitively the speed of accumulation and release of systemic risks within one single market efficient cycle,the third part of empirical studies in this dissertation applies not only theoretical analysis but also mathematical derivation to deduce the asymmetric characteristics of risks.I synthesize the fluctuation variance of risk indicators on stock markets,and applied a non-linear smooth transition model.The conclusions are as follows:China's stock market has negative thresholds,high transition speeds,and larger coefficients regarding to negative shock,indicating that systemic risks in stock market are more sensitive to negative shocks,and that risks accumulate and release asymmetrically.However,the difference between the coefficients of negative strike and positive strike is not large,which indicates that asymmetric feature of the accumulation and release of risks is far less than significant on China's stock marketFinally,based on the theoretical and empirical studies,this dissertation provides guidance for the supervision over systemic risks and financial crisis.From the perspective of stock market in general,improving its efficiency and shortening the market efficient cycle are the fundamentals to prevent systemic risks.From the perspective of one single cycle,reducing the degree of risk accumulation and slowing down the release of risks can resolve systemic risks and achieve financial "soft landing",preventing the outburst financial crisis.