Macroeconomic perspective on constructing financial vulnerability indicator in China
DOI: https://doi.org/10.3846/jbem.2020.13220Abstract
This paper attempts to develop a financial vulnerability indicator for China as a barometer for the state of financial vulnerability in the Chinese financial market, possibly for real-time application. Twelve variables from different sectors are utilised to extract a common vulnerability component using a dynamic approximate factor model. Through the implementation of a Markovswitching Bayesian vector autoregression (MSBVAR) model, the empirical results indicate that a high-vulnerability episode is associated with substantially lower economic activity, but a low-vulnerability episode does not incur substantial changes in economic activity. Notably, the constructed indicator can serve as a real-time early warning system to signify vulnerabilities in the Chinese financial market.
First published online 20 November 2020
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financial vulnerability indicator, financial crises, early warning system, dynamic factor model, Markov-switching model, ChinaHow to Cite
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Copyright (c) 2020 The Author(s). Published by Vilnius Gediminas Technical University.
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