Study On Spillover Effects Of Financial Market Risk

As the rapid development of the world economic globalization and China’s reformand opening up policy, the financial market plays an essential role in the developmentand opening up of our economy. However, the financial risk accumulated by the rapiddevelopment of economy can not be effectively controlled, thus it will lead to afinancial crisis, which will destroy the balance of our economy. Moreover, it will lead toeconomic disorder and political crisis. Therefore, it is important to guard againstfinancial venture and maintain the national economic security. Meanwhile, this is themajor issue we need to solve.The focus of this paper is on measurement, management and analysis of thefinancial markets risk in an environment that the global financial market would meet theU.S. national debt crisis again. At the same time, the influence of the subprime crisisand the European debt crisis is not disappear. The thesis creates favorable conditions foridentification and management of risk, which is of great theoretical significance andrealistic value.The paper starts from estimating the spillover effect of financial risk. Then, itclarifies the risk and effect in economic system. Next, it analyzes the economic risk byusing some quantitative methods such as VaR, ES, GARCH, SV, COPULA, MCMC.Finally, it discusses how can we use effective ways to guard against financial ventureand vindicate the stability of the economic system. The next paragraph will give usmore details.When Extreme loss occurs, the estimate based on QVaR will underestimate the risk.However, the financial regulators care more about the maximum potential risk that thefinancial assets will face in an huge economic loss. In order to avoid thesedisadvantages of QVaR model, this paper uses the CARE model which is based onExpectile and CAViaR model to calculate the return of VaR and ES. At the same time,the thesis uses the result to measure the financial risk. The finding of the empiricalanalysis is that the CARE model is better than the RiskMetrics and CAViaR model inestimating and predicting the return of VaR. Moreover, the CARE model has advantagein estimating the ES.In Econometrics, the essence of analyzing market risk is to examine itsrisk-Granger causality. This paper use the Granger causality and Copula-GARCH modelto analyze the Extreme risk spillover effect between the China’s and American stock market. The result shows that the extreme risk spillover effect of Chinese stock marketmade by American stock market is obvious than that China makes to America.Especially, the extreme risk spillover effect is more dramatic in economic depression.This paper points out the mean spillover effect between currency market and goldmarket by using Granger causality. Furthermore, it elaborates the spillover effectbetween currency market and gold market.The empirical results show that the foreignexchange market has strong mean spillover effect on the gold market, while the goldmarket has no spillover effect on the foreign exchange market in the subprime crisis.Furthermore, there is dramatic mean spillover effect between the currency and goldmarket in the European debt crisis. However, the volatility spillover effect between thecurrency and gold market is obvious in economic crisis, while in an steady economicperiod,the effect is not obvious.Time-varying Copula function can flexibly select the particular form of marginaldistribution assets and consider the time-varying correlation between the marginaldistribution assets and the structure with them separately. Moreover, it can capturenonlinear and asymmetric dynamic relationship in variables. EVT extreme value theorywhich can overcome disadvantages of other methods is an effective way to measuremarket risk in extreme circumstances. CoVaR not only can measure the risk of a singlefinancial market overflow, but also be able to capture the change of the systematic risk,is a comprehensive and effective risk management techniques. This paper studies therisk spillover effect between the the stock market in mainland China, Hong Kong, theUnited States and Europe by using EVT-Copulas-CoVaR model which made up ofextreme value theory, CoVaR model and Copulas.The empirical results show that the U.S. stock market has one-way risk spillovereffect on China’s stock market, followed by the Hong Kong stock market,whereas thespillover effects of European stock is very limited. The impact that Mainland China andHong Kong stock market brings to European and the United States stock market is veryweak. However, the two-way spillover effect is significant between The U.S. andEuropean stock market. This means that we can predict the extreme risk of Chinesestock market by analyzing the history of the U.S. stock market.Overall,the thesis proposes workable and feasible policy recommendations andpoints out the future research work by summarizing the research content of the wholedissertation.