The Construction And Analysis Of National Financial Crisis Early Warning Index

Experience tells us, preventing financial crisis and maintaining financial stabilityis indispensable to not only the stability and prosperity of financial industry itself butalso to a countrys political, economic and social development. The open of Chinasfinancial industry to international market greatly increased the degree of riskexposure.With the arrival of December11,2006, the protection is over during China’sentry into WTO. The speed of opening of financial market become more and morefast, and the range become more and more wide. In view of so many complicatedfactors of instability, maintaining financial stability becomes more difficult and urgent.In addition, in2008the United States subprime mortgage crisis and2011Europeandebt crisis caused the influence of different level and destruction. So it is in theChinese market. At this time, the analysis of Chinas financial stability, construct thestability of financial early warning index system become significant.In this paper, the current literature at home and abroad was reviewed first. Thenthe basic theory of financial crisis is enumerated in the next part. We state therelationship between the basic theory of financial crisis and the financial crisis earlywarning model. Because there is no traditional financial crisis in our nation, westructure a crisis pressure index (CBSPI) on the part of model construction, to depictChinas financial crisis pressure. In this article we preliminary select4majorcategories of variables such as international trade and balance of payments, financialindustry, international economy and macro economic and financial status. Then siftsome appropriate variables by Granger causality test and single-variable linearregression model. Finally we finish the early warning task by binary choice Logitmodel. We calculate the probability of financial crisis happening and set thethreshold of the probability. When the probability calculated by the model is over thethreshold the early warning model will work. Then we find that in the past two years,in August,2011have higher probability of financial crisis. This is the result of globalfinancial turmoil caused by the European debt in2010and2011.