Research On The Time-varying Tail Risk In Chinese Financial Markets

The Central Economic Work Conference has repeatedly emphasized the need to prevent financial risks and to improve the supervisory capacity and level of financial regulators to ensure that no systemic financial risks occur in financial markets.However,extreme events have occurred in international and domestic financial markets from time to time,especially since the 1970 s,and the degree and frequency of financial market volatility has been increasing.These extreme events triggered tail risks,which aggravated the accumulation of systemic risks,will not only affect the opening of China’s financial markets and capital market reform,but also have a negative impact on the development of China’s real economy,so it is necessary to strengthen the extreme events.Therefore,it is necessary to pay more attention to the tail risks caused by extreme events.In the context of long-term uncertainty in the global economy and finance,this thesis attempts to study the tail risk in financial markets from three levels: the contagion mechanism of tail risk,the impact of the tail risk,and the tail risk countermeasures.The content covers the contagion and spillover effects of tail risk in financial markets,the relationship between tail risk and expected stock returns,and the impact of bailout funds on tail risk.Specifically,based on complex network theory,Copula technology,and risk Granger causality test,this thesis constructs a tail risk dependent network,a tail risk spillover network,and a comprehensive network of tail risk in China’s financial system,and studies the contagion mechanism of tail risk within China’s financial system through network topology.Secondly,based on the framework of the stochastic discount factor model proposed by Chabi-Yo et al.(2018),the time-varying Copula method is used to calculate the tail dependence coefficient between individual stock returns and stock market liquidity,measure the tail risk of individual stocks,and study its relationship with expected stock returns.Finally,this thesis studies the impact of bailout funds on tail risk,analyzes how bailout funds help troubled listed companies by providing liquidity and boosting investor confidence to affect tail risk.The main conclusions of this thesis are as follows:Firstly,based on the results of the tail dependence network,tail risk spillover network,and comprehensive tail risk network between financial institutions,(1)at the financial system level,during the crisis,the above three tail risk networks have a relatively high network density and global efficiency,indicating that the financial system is at a high level of risk during the crisis,while the tail risk level in China’s financial system is relatively low during normal times;(2)at the financial sector level,tail risk between financial sectors is asymmetric,and for the tail dependence network,the lower tail dependence is greater than the upper tail dependence.For the tail risk spillover network and comprehensive tail risk network,the asymmetry of tail risk spillover between financial sectors mainly lies in the direction and size of spillover;(3)at the level of financial institutions,various financial institutions play different roles in the risk transmission process,and these roles change dynamically with time.Overall,banks and insurance institutions are the main recipients of tail risk spillover in China’s financial market,while securities institutions are the main issuers of tail risk between China’s financial institutions.Secondly,based on the results of tail risk and stock expected returns,it is found that:(1)the systemic tail risk of stocks is significantly positively correlated with expected returns,and a hedged portfolio can achieve an average return of up to 1.4%;(2)the risk premium required by tail risk cannot be fully explained by other explanatory variables such as beta,size,bookto-market ratio,momentum,liquidity,coskewness,cokurtosis,idiosyncratic volatility,downside beta,tail beta,and crash sensitivity proposed by Chabi-Yo et al.(2018);(3)the occurrence of extreme events significantly increases the risk premium required by tail risk.Finally,the research on the assistance of bailout funds and tail risks shows that:(1)the assistance of bailout funds can effectively reduce the tail risks of listed companies;(2)during the equity pledge crisis,the impact of bailout funds on listed companies is carried out through two mechanisms: providing additional liquidity to relieve the liquidity of listed companies and improving investor confidence during the crisis;(3)the effect of bailout funds is greater in non-eastern regions and small-scale enterprises.The characteristics and innovations of this thesis are reflected in the following aspects:(1)Based on tail dependence,Granger causality test for risk,and complex network analysis methods,this thesis constructs tail dependence network,tail risk contagion network,and tail risk comprehensive network.From the perspectives of tail correlation,tail risk contagion,and their comprehensive analysis,the thesis comprehensively depicts the evolution of tail risks within China’s financial system,enriching the research field of systemic risks.(2)Using the framework of the stochastic discount factor model proposed by Chabi-Yo et al.(2018),this thesis uses Copula to calculate the tail dependence coefficient between individual stock returns and market liquidity as a new tail risk indicator.Based on this,the thesis studies the relationship between tail risk and expected stock returns,expanding the research on tail risk,liquidity,and crash risks in asset pricing.In addition,previous studies only considered investors’ risk aversion and downside risk aversion,while this study focuses on the impact of investors’ crashe aversion on risk premiums.(3)Based on the tail risk indicator proposed earlier,this thesis extends a new research perspective on the impact of bailout funds on tail risk and innovatively explores the impact of bailout funds on tail risk.As China’s bailout fund is still in its early stages and data acquisition is difficult,most of the current research is qualitative,and very few consider the above issues from an empirical perspective.This study solves the above problems.In addition,by revealing the mechanism by which bailout funds affect tail risks,this thesis provides empirical evidence for the continuous and healthy development of bailout funds and also provides empirical evidence for the formulation of policies related to maintaining market stability during crises.