Sudden Stops And Systemic Risk Prevention

With the continuous progress of global financial integration,the frequency and scale of international capital flows are increasing day by day,which also makes systematic risks spread all over the world.In particular,as the actual medium of international investors’ transactions,the extremed capital flow Sudden Stop is bound to affect the stability of the global financial system.Therefore,how to effectively identify Sudden Stops and empirically examine its impact on cross country and cross market systemic risk contagion is of great important practical significance.It not only helps us understand the theoretical mechanism of Sudden Stops and systemic risk contagion,but also provides important decision-making references for how to effectively prevent transnational systemic risk contagion caused by Sudden Stops.In this regard,based on the definition and identification of Sudden Stops,this paper examines the relationship between Sudden Stops and systemic risk contagion effects from both theoretical and empirical aspects.Firstly,international capital flow is introduced into the traditional portfolio theory and capital asset pricing model,and a new optimal portfolio efficiency frontier boundary and optimal capital market line including international inflow capital are derived.It is mathematically proved that how international capital inflow affects the optimal portfolio frontier boundary and optimal capital market line,and the relationship between Sudden Stops and the financial systemic risk of portfolio is discussed theoretically.Secondly,the network spillover index with high-dimensional time-varying parameters is extended to describe the network infection mechanism of global systemic risk.Thirdly,this paper empirically tests the impacts of Sudden Stops on extreme systemic risk and cross-border transmission of systemic risk by using a variety of econometric measurement methods.The empirical results show that:(1)Sudden Stops significantly improve the probability of the occurence of extreme systemic risk.In the process of extreme systemic risk caused by Sudden Stops,there is a transmission channel of "Sudden Stops → extreme tail behavior of bond market / extreme tail behavior of foreign exchange market → extreme systemic risk".In addition,the intermediary effect of the stock market is not tenable.The reason for this may be that compared with bond markets,the stock markets of different countries are relatively closed,and there are access restrictions on global investors’ trading qualifications,trading scale,etc.in the global stock markets,making it less impossible for international capitals to freely flow and hedge in the globle stock markets with a large scale.(2)The main factors affecting the intensity of the cross-border contagion effect of systemic risk are the cross-border capital flow behavior(including the capital flow caused by speculative capital flow and non speculative trade surplus)and the scale of domestic systemic risk.Among them,Sudden Stops strengthen the spillover effect and absorption effect of cross-border infection of systemic risk.In particular,the arbitrage motivations of the interest rate and the exchange rate of international capital flows are two important channels that affect the global systemic risk contagion,but the arbitrage motivation of asset prices has not had an impact on the systemic risk contagion.One main reason may be that the stock markets of different countries are relatively closed compared to the bond markets,which inevitably isolates the contagion effect of hedging behavior on the external spillover and absorption of systemic risks.(3)The impact of Sudden Stops on the intensity of risk contagion effect in different financial markets is heterogeneous.Specifically,Sudden Stops strengthen the spillover intensity and net intensity of tail risk in the foreign exchange market.For the bond market,the effect of Sudden Stops on the intensity of risk contagion is not significant.And the regression results based on the stock market show that Sudden Stops enhance the absorption effect of local stock market on international risks.The main innovations of this paper are as follows.(1)In the traditional portfolio and capital asset pricing model,the cross-border capital flow factor is introduced and based on the mean variance portfolio model,and a theoretical model of the relationship between Sudden Stops and systemic risk is constructed,which is an important theoretical supplement to the existing literature.(2)From the perspective of extreme state of systematic risk and multiple motives of international capital flows,this paper investigates the impacts of Sudden Stops on extreme systemic risk and its mechanism,as well as the impacts of Sudden Stops on the transnational and cross market contagion intensity of systemic risk,which further supports the theoretical model of this paper.(3)The network spillover index based on high-dimensional time-varying parameters is improved to describe the dynamic spillover path and spillover intensity of the overall systemic risk and financial market systemic risk of G20 countries from2004 to 2020.