The Measurement And Prediction Of Chinese System Financial Risk

Since the 1990 s, the world have experienced many financial crisis such as the Japan bubble crisis, the Latin American debt crisis, the Asian financial crisis, the 2008 global financial crisis, the European debt crisis and so on. When financial crisis occurs, it will bring fatal impact to the economy and finance of a country or region, even the world. The fatal impact include business failures, unemployment, economic order is disrupted severely, but not limited to these phenomenon. In order to prevent systemic financial crisis broke out again, more and more scholars dedicated to investigate the causes of systemic financial risks, the transmission mechanism, measurement methods and forecasting methods, this will provide adequate theoretical basis for government making decisions.At present, China have been in the special stage of reform and transition: the economy continues to change, the financial system continues to improve, but this period is also the country’s financial system is most vulnerable time, the possibility of the outbreak of systemic financial risk is relatively large. Once systemic financial risks evolved into a full-blown financial crisis and even the economic crisis, our country and even the world will give a devastating disaster, and therefore prevent systemic financial risk early warning will become a top priority. In this regard, this paper will combine research scholars construct indicators measure systemic financial risk.This paper answers three questions: what method will be used to measure the systemic financial risk? How to build indicators to measure systemic financial risks? The possibility of systemic financial risks breakout that China is facing is big or small?By reading and summarizing the literature about measuring systemic financial risk, this paper will find the most suitable measurement of systemic financial risk---the financial stress index. On this basis, by combining of China’s actual situation, this paper chose four variables and a variety of methods to empower to build the financial stress index. The index can provide a better description of the financial risks since 2002. At last, this paper will use the ARIMA and VAR model to predict the possibility of systemic financial risk which our country will be suffered in the future. The studies have shown that, within the next year, the tendency of the systemic financial risks is on the rise. This result suggests that the government should pay attentions to the tendency..This paper has five sections:The first part is the introduction, mainly introduces the background and significance, literature review, research methods and thesis of this paper is organized.The second part is the literature review. This section first briefly describe the history of systemic financial risk measurement methods, and its contrast, concluded: financial stress index method is the best method currently measure systemic financial risks. Secondly, the history of financial stress index was reviewed, then this paper will summarize the methods of classical literature to build financial stress index, and give comments.The third section describes the construction of financial stress index preparation. Mainly from four aspects: the principle of selecting a variable, select the variable, the weights given to construct other indicators. The main principle of variable selection is to summarize the results of previous research and learning, combined with China’s actual situation to be modified. Select the variable is based on the principle of variable selection, and ultimately selected four variables. About the choice of weights, we use a variety of methods empowerment, including the right to equal weight variance, the market share weights, CDF weights, CDF- market share weights. The last is to build indicators, namely sub-index for each market plus total.The fourth part is the application of financial stress index for China’s actual financial situation fitting and forecasting. Firstly, the financial stress index and our past experience financial stress events by comparing constructed, the fit indices were observed. Since then, on the basis of the previous text, this paper will use the ARIMA and VAR model to predict the likelihood and severity of systemic financial risk which we will suffer from.The fifth part of this paper is the summary, and the next is policy proposals. Firstly, the results of this study will be summarized; the next is the summary of the shortcomings and innovation of this article. At last, this paper will will propose appropriate policy recommendations based on the findings.