A Study Of The China Financial Stress Index:Measurement,Identification And The Effect On Mutual Fund Pricing

Stemming from the subprime crisis in 2007,the global financial crisis not only brought serious economic losses to major countries,but also caused financial risk and financial markets’structural changes in various countries.In order to enhance the identification and prevention capabilities of financial risk,the financial institutions,government departments and scholars from all over the world have explored new laws of financial markets,and particular emphasis on the fragility of the financial system and the financial security of the country after the global financial crisis.How to assess,prevent and resolve the systematic financial risk of the financial system has become an academic and policy issue that has received wide attention in the worldwide.Economists and policy makers recognize the importance of identifying and measuring systematic financial risk,and also recognize that this is a key task in financial stability and macroprudential regulation during this new era.As the development of Chinese economic enters a new normal era,Chinese financial industry has also entered a major turning point.Chinese financial industry will suffer a new normal feature that the financial risk will occur frequently in the current and future period.So at the government conferences in recent years,the central government has put the prevention of financial risk at the forefront.At present,“holding the bottom line of systematic financial risk”is Chinese prioritized financial work.Under the new era,it is necessary to build Chinese financial risk prevention system,monitor the systematic financial risk timely,early warning the major risk and improve the policy intervention mechanisms.In view of this,this paper aims to consider Chinese conditions,improve the EM-FSI index issued by IMF（2011）,and prepare a real-time monitoring index----China Financial Stress Index（CFSI）for systematic financial risk and specifically for Chinese financial system.The index aims to portray the rhythm of financial market risk and dynamically monitor the basic situation of financial security.EM-FSI selected the six factors of the banking industry’s beta coefficient,stock index yield,time-varying stock index volatility,sovereign bond spread,exchange rate depreciation and foreign exchange reserve to measure the stress of 25 emerging market countries.At the same time,the IMF also released the Advanced Financial Stress Index（AE-FSI）.In addition to the above six source indicators,AE-FSI also includes two indicators of banking Tedley spread and term spread.Therefore,the new index system constructed in this paper increases the neglected Tedley spread and term spreads of the banking industry based on EM-FSI,in order to better reflect the stress changes in Chinese financial markets.The improved China financial stress index system has the overall financial market index CFSI,and also covers the three financial markets with high financial risks in the banking,securities and foreign exchange markets,namely the sub-market risk indices are CFSI_bank、CFSI_security and CFSI_FX.To fully verify the applicability of the CFSI index system in China,based on the constructed Chinese financial stress index and sub-market indices,this paper discusses the practical application of financial stress index:the prediction of future macroeconomic changes in China;the current situation of the spillover effect of China-US financial stress;the prediction method of financial stress index;the identification of the risk states of Chinese financial stress in the new era.Furthermore,this paper improves and complements the existing research framework and to propose the financial stress index can be used as a macroeconomic factor.Cutting in the investment theory from the macroeconomics perspective,it makes a deep understanding for fund return research.Finally,this paper summarizes the research conclusions,and establishes a new understanding of the systematic financial risk from the financial markets’perspective,then proposes policy recommendations for systematic financial risk supervision.The main research innovations and contributions of this paper are:First,improve the EM-FSI index issued by the IMF（2011）and build the China Financial Stress Index（CFSI）.The first improvement is to refer to the published financial stress index of developed countries and to incorporate new indicators that better reflect the stress on Chinese banking industry,namely the banking industry’s Tedley spread and the term spread.The second improvement is to supplement the beta coefficient of the Chinese banking industry that is ignored by the domestic literature.The sample period of the improved China Financial Stress Index CFSI and the Sub-Market Index CFSI_bank、CFSI_security and CFSI_FXX is from January 1997 to December 2016,capturing the pulse of Chinese financial market risk from different market perspectives,corresponding one by one to historical crisis events.Secondly,under the background of reshaping the financial order,the financial stress identification index is constructed to identify the extremely high-risk events of the Chinese financial system,and the Markov switching model is used to identify the two-zone risk switch characteristics of the financial market.The systemic risk crisis in financial markets proposes effective means of prevention.Therefore,the regulators of the Chinese financial system and the makers of economic policies should actively maintain the stability of the financial system in order to maintain the bottom line of non-systemic risks,and should regulate the behavior of financial institutions through“proactive”interventions and adjust policies in a timely manner.Based on this,the first attempt to explore the reasons for the rise of Chinese economic policy uncertainty（EPU）under the new order from the perspective of financial market risk,and proposed that financial market risk will impact the economic policy through banking,securities market and foreign exchange market.As of the end of 2016,global and Chinese economic policy uncertainty has risen to a record high.This paper argues that the reasons for this uncertainty in economic policy are most likely related to the accumulation of Chinese systematic financial risk during this period.The empirical finding that Chinese financial market risks will positively impact Chinese economic policy changes through financial stress in the three markets of banking,securities and foreign exchange markets.When the stress on the financial market increases,the government will continue to introduce a number of economic policy measures,thereby increasing the uncertainty of Chinese economic policies.Thirdly,it proposes a financial stress index that is easier to implement and measure,then deeply analyzes its real-time tracking of macroeconomic fluctuations,improves and supplements the existing research framework,and views the asset return prediction puzzle from a new perspective of financial stress.The existing research framework has two characteristics.First,lack of macroeconomic tracking indicators for fund return research.Most of the existing research literatures use big data methods or high-order calculation methods,involve macro-micro details of the economy,and track macro-economic fluctuations.It is difficult for most small and medium-sized financial institutions in empirical manipulation.Second,lack of effective measurement methods suitable for the study of Chinese mutual fund return.The Fama-French three-factor and momentun factor have good applicability in Chinese stock market,but its effect on Chinese mutual fund remains to be discussed.The results of this paper and other domestic scholars have shown that the Fama-French three factors and momentun factor are not applicable to the Chinese mutual fund market.In order to improve the existing research framework,this paper finds a new effect factor----financial stress,which can affect Chinese mutual fund return,,increases the new macro factors suitable for the fund investment market,and proposes an effective measurement method to explore the financial market deeply.The impact of information on fund return fills the gap between the pricing of Chinese mutual fund return and macroeconomic fluctuations,and makes up for the shortcomings of existing research:First,compared with the existing tracking index of macroeconomic fluctuations,the financial stress index proposed in this paper has obvious comparative advantages:the financial stress index is easier to implement and measure;the logic of the source index selection of financial stress index is more rigorous;the stress index contains information on economic cycles and macroeconomic risks.Secondly,the empirical results show that the Chinese financial stress index constructed in this paper can be used as a market signal to influence and predict the trend of future fund return.Finally,unlike the performance of US mutual fund,the Chinese mutual fund market pays more attention to the tracking of the macro situation.Mutual fund have the ability to choose timing,but the timing ability needs to be improved.Therefore,this paper suggests that investors refer to the changes of financial stress to capture macro market information and make corresponding timing investment decisions,which will help optimize the fund return.The main research contents and conclusions of this paper are as follows:Chapter One is the introductory part.It mainly proposes the research questions,expounds the background of the research topic,and discusses the research significance of this paper.Then define important concepts.Finally,the content of research methods and logic ideas,major innovations and future research prospects are summarized.Chapter Two is the research review.It is mainly divided into two parts:literature review and opinions review.The literature review summarizes the research of domestic and foreign financial stress index,and its development,construction and application,then expands to the theoretical framework,empirical development and cutting-edge research progress of capital asset pricing based on macroeconomic fluctuations.The opinions review section presents two important points that illustrate the connection between the research questions and the literatures.First,from the analysis of systematic financial risk in the three dimensions of macro,micro and spillover,the synchronization of financial stress index and systematic financial risk is proposed.Second,because the financial stress index contains economic and financial information and it can predict macroeconomics contraction,this suggests the possibility between asset pricing and financial stress index.Chapter Three is the Chinese financial stress index construction and application.Theoretically,this part detail the conception of financial stress,important characteristics and its impact on the macroeconomic slowdown,and also explain the careful selection of several indicators that can effectively reflect Chinese financial stress in time.From an empirical perspective,we will construct Chinese financial stress index and sub-market index that are in line with national conditions,and empirically demonstrate the practical application in China.Chapter Four is the identification of the risk states of Chinese financial market in the new era.Intercepting the period from January 2007 to December 2016 as the new period,it is divided into the global financial crisis,the post-crisis era and the new normal period.Based on the Chinese financial stress index established above,establish the identification index of extremely high-risk events----Chinese financial stress identification index,use the Markov state model to identify the two Markov risk switch characteristics of financial markets.In addition,it is also the first attempt to explore the reasons for the rising uncertainty of Chinese economic policy in the new era from the perspective of financial market risk.Chapter Five is the pricing and impact of Chinese financial stress index on mutual fund.It is mainly divided into:the theoretical framework and empirical research on the pricing of fund return by CFSI.In the theoretical part,firstly comb the classic theory that macro factors are closely related to asset pricing.Then analyze the financial stress index as a signal indicator of the leading macroeconomic cycle to reflect the macroeconomic operational risk,which will directly or indirectly map to the asset price trend,and also discuss the applicability and feasibility of the financial stress index pricing in the Chinese fund market for the first time.Finally,based on the financial stress index,establish macroeconomic risk conditional asset pricing model for Chinese fund market,expound the relevant analysis and model hypothesis,and supplement the other important macroeconomic capital asset pricing theory.In the empirical part of CFSI to fund pricing,the 36-month rolling window time series regression method is used to estimate the monthly stress-variant financial stress index expose to the fund returnβ^CFSI.Then chooseβ^CFSI,current fund return and other factors to establish Fama-MacBeth cross-sectional monthly regression on future fund return.The study concluded that the China Financial Stress Index can affect fund return.The financial stress loadingβ^CFSI is mostly spread between[-0.05,0.05],showing a normal distribution characteristic,which indicates that the CFSI index has a good discriminating ability for the mutual fund return.Moreover,the risk exposure of financial stressβ^CFSI has a significant cross-section difference in the Chinese mutual fund return.The financial stress loadingβ^CFSI increases by one unit,the investor needs risk premium of about81%as compensation,and the fund group withβ^CFSI>0 can obtain an average return of 0.32%per month（3.96%per year）,while the fund group withβ^CFSI<0 will loss-0.49%per month（-5.88%per year）.In the empirical part of CFSI’s impact on the fund return,first calculate the impact of financial stress,estimate the financial stress shock to the fund return risk exposure,and then use Fama-MacBeth cross-sectional regression to build financial stress shock on the future fund return betaβ^shock and other control variables,and finally grouped the empirical results according to the impact of financial stress.The research conclusion is that the risk exposure to financial stress shocksβ^shock has a significant impact on fund return.For each additional unit of financial stress shock,the market risk premium increases by 62%⁷3%per month.And the fund group withβ^shock>0 can obtain 0.2%per month,nearly 2.9%per year.While the fund group withβ^shock<0,the average monthly return will loss-0.3%,nearly3.6%per year.In addition,after grouping according to good or bad shocks,the market price of the bad shock group is about 74%⁸9%and is significant,and the market price of the good shock group is about 39%⁵5%but not significant.The economic significance is that the impact of financial stress on fund return is asymmetric.When the macro financial market environment is getting better,the fund market may not be able to accept signals quickly or have high risk compensation,but when the market continues to get worse,the investors will be asked for higher risk compensation.Chapter Six is the summary of the full paper research conclusions and policy recommendations.According to the research framework,this part summarizes the conclusions of each chapter,and combines the main viewpoints and conclusions of the research to explain the analysis of systematic financial risk from the financial market.On this basis,the corresponding regulatory recommendations are proposed,including:establishing a financial market early warning index to dynamically monitor financial market risk;establishing a comprehensive sub-market systematic financial risk monitoring for major financial market;and vigilance against systematic financial risk spillovers between financial markets and Contagion;taking into account the monitoring of systemic financial risk of micro-financial institutions;proposing a macro-micro-prudential and new regulatory mechanism for systematic financial risk.In short,based on financial stress to study Chinese systematic financial risk,this paper is not only limited to systematic financial risk itself,but also organically integrates the measurement,impact,spillover effect,forecasting and capital asset pricing of financial stress index.It has formed a comprehensive and systematic research framework.