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Identification and Measure of Financial Market Stability

Author: ShiJinFeng
Tutor: ZhangXinWei; LiuWeiQi
School: Shanxi University
Course: Management Science and Engineering
Keywords: Financial market stability Financial efficiency DEA Stability index Quantile regression Complex network
CLC: F831.5
Type: PhD thesis
Year: 2012
Downloads: 916
Quote: 0
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The subprime mortgage crisis evolved into a global financial crisis and then triggered a world economic recession. Furthermore, spreading debt crisis in Europe forced euro area on the brink of collapse. The influence of the crisis extends to the real economy which leads to large-scale closure of small and medium enterprises, at the moment when the financial crisis spread worldwide financial systems. And the systemic risk in the whole financial markets has played a more important role in the development of economy and finance. With the deepening of financial globalization, the capital has been reallocated around the world, and the global financial markets are linked more and more closely. The crisis in any country is very likely to pass to other markets, triggering the comovement of a number of markets and reflecting a high degree of transmission characteristics, which make the the linkes between countries to be more complexly, and any country is difficult to been immuned. Therefore, it is more complex to prevent financial market risk. Not only the risk of a single market, a single industry, or individual financial institution need been focused on, but also the systemic risk from a macro and a holistic perspective should been considered. Thus, the questions, such as how to guide stable and healthy development of financial market from a holistic perspective, and ensure steady and rapid growth of economy, are of concern to the world, which raise the practitioners and academics’deeply reflection and get the attention of the world financial organizations and various governments. Joint Declaration of the G20finance ministers and central bank governors states that they will take all necessary measures to jointly safeguard the stability of financial markets. IMF vice president John raised the need for large-scale of financial stability assessment considering the interconnection between countries, and China government clearly stated, in the "12th Five-Year Plan", a counter-cyclical financial macro-prudential management system framework will be built, which are the efforts they made to establish a more effective regulatory system with a systematic and global perspective. So the global financial and economic prosperity are inseparable, and the responsibility of sustaining the stability and health of financial market has to be shared. It is more important to make sure the domestic regulatory systems are strong, and establish the much greater consistency and systematic cooperation between countries. We also need to construct the international regulatory framework with high standards, which a global financial system requires to ensure the stable and healthy development of financial markets based on the global systemic risk. Therefore, the exploration of financial market stability has both theoretical value and experience value.In the era when frequent crises break out, what deserves our more concern is the stable and healthy development of financial market. However, how the financial market situation exactly is, and how to ensure the stable operation of market, and why local damage will cause the overall collapse of financial system, and why such a small-scale subprime mortgage will lead to such serious consequences, and which nodes of the financial system will lead to collapse of the entire financial system, and how the shock effect is contagious in the financial system and spread to other areas. Inspired by these, this paper explores the stability of financial market based on the system perspective, and the internal stability of financial market based on the information efficiency of financial market and output efficiency of financial institutions. We also give the new definition and judging criteria of financial market stability focusing on external systemic shocks’magnified effects, and build stability index for monitoring the operation of financial market and find the methods detecting the most unstable and key parts of financial systems which are most destructive. This research provides new technical methods for the effective regulation on financial markets and a theoretical basis for macroeconomic policy-making guaranteeing financial market stable and healthy development.In this paper, we firstly study the financial market efficiency based on macro and micro aspects and have a reasonable measure of China’s financial market efficiency levels. And then we will determine the internal stability of financial market depending on the extent of market information efficiency and convergence rate of output efficiency. The empirical results show that there are no arbitrage opportunities to acquire the excess returns from the historical price information, that is to say, China’s financial market has achieved weak form efficiency and moved forward by a more effective and stable trend. In addition, there exist convergence characteristics of output efficiency of China’s financial institutions and a highly effective developing trend, which characterize the gradual increase in the internal stability of financial market. Under the background of systematic shocks in the global environment, we have designed a method of testing the stability of financial market and analyzed the stability of China’s financial market which supports the conclusions that our fianacial market has a more stable state. Moreover, we have built a stable index. Based on China’s market, we have examined the effectiveness and robustness of the stable index, and then analyzed the stable situations of thirteen representative countries to find out the time difference from financial crisis impacts between different country markets. Through the framework of the financial network, we also propose to explore the important degree of various participants in the financial network to the entire financial system stability, and take our efforts to prevent and resolve the potential risks of the key parts, and enhance the overall strength of the financial industry and anti-risk ability which provides a new way of thinking for exploring the establishment of financial macro-control supervising system, guarding against systemic risk and maintaining financial stability.

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CLC: > Economic > Fiscal, monetary > Finance, banking > World of finance, banking > Financial market
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