The Research Of China's Macro Financial Instability With Change-point Theory

Finance is the core of modern economy, and we find that macro economic fluctuations are caused by the financial instability, no matter from the logical analysis or from the historical experiences. The negative effects of macro financial instability are being paid a lot of attentions and studied deeply, especially those of its highest level formation---the financial crisis. Such studies are of great importance.The modern theory of financial instability puts forward an "inherent financial instability" proposition through exploring the traditional theories of monetary stability and banking institutional crises. The financial instability as an economic normality brings lots of impacts on the financial structure and institutional arrangements. It is of great significance to study this subject for the national economic management. In the context of economic and financial globalization, with China's accelerations on financial liberalization, capital markets opening and close relations with the world's finance, the risks that the economic development especially financial markets are facing increase inevitably. Whether we can sustain financial system stable and maintain the growth of our macro economy healthy is a major concern of the researchers and the supervisors.This article summarizes the former research theories and constructs the macro financial instability integrated index with principal component analysis method and eight indexes which are classified into three categories, considering the reality in China and the availability of the data. The author seperates the period from 1998 to 2009 into three different parts according to this integrated index:from 1998 to 2002(the early half of the year), the integrated index is quite low, indicating the macro financial situation is comparatively stable; at the end of 2002, the index is increasing sharply because of the "political cycle", and then gradually decreases; the third period beginning from the third season of 2007.Affected by the American subprime crisis, the macro financial instability integrated index is quite high and reaches the top of the whole research period, indicating the greatest risk we are facing.The emphasis of this article is the part of the empirical research on the constituent index with the change-point theory. First, there is an introduction of the significance of change-point theory and the current research situation of this subject; then, a single index is chosen which is one of the former eight indexes and covers a lot of macro financial information (for example, M2), and a modeling is constructed with this index. With the help of the computer, it's easy to find whether the sample period is stable using partial comparative method of the change-point theory. If there are abrupt change points during this period which means there are some huge changes, it's necessary to make sure the number of the change-points and the concrete time in the further step.After the calculation of M2, it shows two change-points during the sample period, which are November in 2002 and August in 2007. Applying the same calculations to the loan index data and the deposit index data, quite similar results are acquired. The first change-point happens because of the "political cycle" and the accelerating risk after the entering WTO, and the second one is caused by the global financial crisis beginning with American subprime crisis. The conclusions are quite similar to the research of the integrated index and it is consistent with the reality in China.