A Study On The Impact Of Leverage Volatility On Systemic Financial Risk In China

Leverage fluctuations may adversely affect economic and financial stability through speculative capital or binding real asset values.Therefore,as an important measure to prevent systemic financial risks and promote stable economic growth,"maintaining the basic stability of the leverage ratio" has been repeatedly mentioned in the Government’s Work Report over the years.prior to 2016,China’s macro leverage ratio showed a rapid upward trend,with a cumulative increase of nearly 60% in three years.While the financing needs of market players are being adequately met,the rapidly rising leverage levels within enterprises may cause credit default risks and make it more difficult for the government to regulate macro policies.In recent years,the government has continued to clarify the reform task of "deleveraging" and has gradually promulgated a series of financial regulatory policies coordinated by the National Financial Stability Development Committee,making leverage regulation more systematic and standardised.However,the strong regulatory policies and economic emergencies in the early stages of the country have created significant fluctuations in leverage across multiple sectors,making it difficult for monetary policy to regulate accurately.At the same time,there is a significant non-linear correlation mechanism between various economic sectors,and the impact of external risks in one area of the economy may lead to systemic financial risks through risk linkages with other sectors,resulting in "risk resonance" in the overall economy and society.Systemic risks are therefore characterised by strong correlation,high complexity and high risk,and the 20 th Party Congress has made "safeguarding the bottom line against systemic financial risks" a top priority for China’s financial supervision.It is true that there are many external factors that trigger systemic crises,so this study takes multi-sectoral leverage volatility as an entry point and a market economy with Chinese characteristics as a logical background for research.Firstly,based on the existing literature and fundamental theories,the theoretical mechanism of how leverage volatility affects systemic financial risk is constructed,with a view to "standing on the shoulders of giants" to demonstrate the value and innovation of the study;secondly,the characteristics and influencing factors of multi-sector leverage volatility are analysed by combining HP filtering and event analysis(ES).The study not only highlights the necessity of choosing leverage volatility as a research perspective,but also incorporates the dual regulation of the "visible hand" of the government and the "invisible hand" of the market as an important factor of influence throughout the text.Then,a time-varying parametric structural vector autoregressive model(SV-TVP)is constructed to analyse the heterogeneity of how leverage volatility affects various sectors of systemic financial risk at equal intervals and at different points in time,and to identify the external effects of leverage shocks on risk;then,the time-varying parametric structural vector autoregressive model is combined with the predictive variance decomposition technique to construct a time-varying spillover framework(TVPDY)to analyse the overall risk spillover effects and sub-sectoral spillover effects under the influence of leverage volatility.A complex network topology model based on risk spillover indices is further constructed to analyse the overall risk contagion effect from year to year and at different points in time;finally,targeted policy recommendations are put forward around the research focus.The study is based on the logical chain of "formation of leverage volatility-external shocks to each risk surface-resulting in a single spillover from the risk surface-internal contagion of systemic risk".The study is designed to explore the possible risk implications of leverage volatility "from the outside in".The main findings are as follows.The first is an analysis of the factors influencing the volatility characteristics of leverage.In terms of overall performance,China’s multi-sector leverage and volatility are on an increasing trend,but there are significant differences in leverage volatility across sectors.Financial sector leverage itself is influenced by the accumulation of asset bubbles and government regulatory measures,showing a trend of "up then down".Non-financial sector leverage fluctuates in phases due to the economic operating environment and policy interventions,but is on a long-term upward trend.Government sector leverage and volatility are relatively stable overall,but rise significantly in times of economic crisis recovery or unexpected shocks.In terms of influencing factors,the three rounds of deleveraging measures hosted by the Chinese government all significantly increased the volatility of leverage across all sectors in the immediate term,but the volatility of leverage caused by "expanding domestic demand","curbing inflation" and "risk prevention" policies was significantly higher.However,the trends in leverage volatility resulting from the "domestic demand expansion","anti-inflation" and "risk prevention" policies were significantly different,due to a combination of policy areas of action,intensity and ex-post safeguards.Heterogeneous economic events also impacted the level of volatility in leverage across multiple sectors: the "international financial crisis" caused anomalous leverage volatility to rise in the positive range across sectors.The "commercial bank money shortage" was limited by the object of the game and the resulting leverage shock was concentrated in the financial and non-financial sectors.The impact of the "new pneumonia epidemic",as a public health emergency,was mostly post-event and had a positive impact on leverage volatility across all sectors in the immediate period.The second is an analysis of the time-varying shock effects of leverage volatility on systemic financial risk.First,the overall volatile situation of the sectoral risks that make up systemic financial risk is strong and vulnerable to external events.Secondly,the time-varying shock effects of leverage fluctuations in each sector on each systemic financial sub-risk with different lags are significant,with the impact of financial sector leverage mostly concentrated in the short term and the impact of non-financial sector leverage on the related risks significantly concentrated in the shock effects with one or three lags,with the most significant impact of government sector leverage on the real estate and equity market risks.The point-in-time effects of the three rounds of government deleveraging policies then differ significantly,with the risk level rising immediately due to the volatility of the sector and policy fears,although the risk may fall back to some extent in the later stages.Finally,the timing of unexpected economic events is more likely to cause variability across risks,with the most significant and uncertain impact of "international financial crisis" events in particular.Third,the analysis is conducted in terms of the unilateral spillover effects of systemic financial risks arising from leverage fluctuations.Overall,China’s systemic financial risk is internally exposed to more serious risk potential in the face of exogenous shocks from sectoral leverage fluctuations.The overall risk spillover index goes through five stages: "false boom before the crisis,post-crisis recession,rapid rise in multi-sector leverage,stabilisation of spillovers and a brief rise".Sub-effects: In terms of individual risk surface exposure,the real estate and foreign exchange markets are more vulnerable to external market risks.In terms of the risk shock effect,the external spillover effect is more pronounced in the equity and real estate markets.In terms of net risk spillover effects,the foreign exchange and bond markets have the highest value-at-risk,and the equity market is an important bridge for risk transmission between sectors of the Chinese economy.Fourth,the analysis is conducted from the complex network contagion of systemic financial risks caused by leverage fluctuations.Overall,real estate market risk,foreign exchange market risk and government sector risk have more significant contagion effects in the risk network under leverage volatility,and the real estate market and government sector are more connected in the risk contagion network.By point in time,there is significant heterogeneity in the contagion network of systemic risks arising from leverage fluctuations under both types of government deleveraging initiatives and economic emergencies.The real estate market remains an important centre of risk contagion,although there are significant shifts in the centres of risk and sub-risk across event types.Fifthly,the logical chain of "leverage volatility-external shocks-unilateral spillover-overall contagion" is used to make recommendations on how to prevent systemic financial risks arising from leverage volatility.The recommendations relate first to risk prevention at key points in time,such as government deleveraging and economic emergencies,secondly to identifying and regulating key systemic areas where the response to external shocks is more pronounced,and then to making targeted adjustments to vulnerable sectors that are prone to risk spillovers under shocks according to their risk spillover directions,and finally to the overall network.The study aims to provide an overall network view on how to manage systemic risk contagion in the face of volatile leverage.The study aims to provide some empirical lessons for future protection against systemic financial risks due to leverage volatility.