The Spillover Effect Of Stock Market Risks

Cross-market risk contagion is an important part of systemic risk.Therefore,preventing cross-market risk contagion is a basic work to resolve systemic risks.The first priority is to explore policy tools from the mechanism perspective,to prevent cross-market risk contagion effectively,so as to provide policy reserves.At present,academics and policymakers focus on precautionary prevention to prevent risk contagion,but neglect intervening interventions.The mutual contagion between financial markets during the 2015 stock-market crash shows that it is not enough to rely on precautionary measures to control risks within a market.When the crisis has come,a practical intervention policy is needed to stop the cross-market contagion of risks.We think that one of the mechanisms for China's stock market to spread risk to other markets is:when the stock market is in problem,the huge pressure on redemption will make the funds which with overall positions sell off any liquid stocks passively.The result of the simultaneous reduction of most funds in the market is the liquidity crisis which like bank run.For China's stock market,the situation will be more special,under the effect of the price limit,the stock may have been the consecutive lower limit without volume.Although the liquidity of the stock market has dried up,the redemption pressure faced by the fund will not been reduced.Funds can deal with the liquidity crisis only by selling other assets.This may lead to the spread of risks caused by the stock market liquidity crisis to other markets,which will cause other markets to also fluctuate violently,forming a cross-market contagion of risks.In fact,the People's Bank of China has also paid attention to the market contagion caused by liquidity shocks.The "China Financial Stability Report 2018"released at the end of last year mentioned the contagion of the monetary fund's risk to currency and bond market.The report pointed out that when there is a "run risk" of fund redemption,currency market funds are forced to fire-sell their assets,so that their liquidity risk is transmitted to other financial markets through the decline of asset prices,and then passed to financial institutions such as commercial banks.Based on the previous experimental research on liquidity shock and fire-sales,this paper designs an asset sales experiment with two asset markets to test the price limit,no price limit,and dynamic price limit.In the market where the market is limited,the liquidity shock that begins in the A asset market will spread the risk to the B asset market under the constraint of market liquidity.In order to test the difference between the market limit and the no-loss limit,first set up an experiment with two different mechanisms.Considering that China's market may not have the conditions to completely cancel the price limit,we set up an experiment of dynamic price limit,and we want to test whether it can avoid further risk contagion when the crisis has already occurred.At the same time,in order to eliminate the impact of the experimental round on the final result,we designed the first round of experiments with no increase or decrcase limit in the second round to ensure the stability of the experimental results.The experimental results show that in the process of market decline,the price limit will aggravate the liquidity exhaustion,and the liquidity will lock the market to completely freeze.At the same time,the price limit will affect the participants'expectations and sales behavior.Participants with reduced or complete loss of liquidity will sell other liquid assets that can be acquired for the purpose of raising liquidity.Under the combined effect of the two factors,the volatility of the relevant market will increase,and the risk will occur.The spillover,although the sale of related assets at this time is not due to the consideration of asset value,but information asymmetry will further trigger market panic and form a comprehensive capital market crisis.The innovation of this paper is to simulate the decision-making behavior of market participants holding certain asset portfolios in the laboratory,and to explore the risk behavior of market participants through a crisis stock market to observe the price limits.The cross-market contagion approach,in turn,provides practical and feasible intervention policy recommendations for risk contagion.At the same time,an important revelation of this article is that the existence of some trading policy itself will interfere market operations.For example,the existence of the price limit will affect the market participants' expectations of the market,and thus affect their market behavior.Even during the period while market is stability,participants' irrational non-economic investment behaviors caused by worried about cannot buying the asset they want or cannot selling the asset to acquire liquidity will lead to further increase in asset market volatility and increased systemic risk.However,the deficiency of this paper is that the design of the asset pool forces the participants to sell but cannot buy the assets,which reduces the decision space of the participants.If the double-auction market is adopted,the continuous spillover of risks can be better demonstrated.And under the double-auction mechanism,it may be possible to further observe the“flight-to-quality".