Construction Of Financial Stress Index And Research On Market Risk Spillover Effects

With the continuous progress of reform and opening up,economic globalization,and economic liberalization,not only has the connection between various financial sub-markets in China been constantly strengthened,but the connection between China’s financial market and the global financial market has also gradually increased.However,behind the rapid development of the Chinese economy,the connection between the Chinese financial market and the international market has also led to the constant accumulation of risks.The complex international political situation has intensified the volatility of the international financial market and the uneven development of various financial markets in the process of China’s development,which are issues that cannot be ignored.Therefore,in this context,monitoring the operation of the financial market is crucial for the central bank to maintain financial stability and conduct macro-prudential management.Abnormal indicators in the financial market are usually one of the phenomena of the outbreak of financial crises.Once a market risk erupts,risks will spread to other markets,increasing the pressure on the entire financial market,and ultimately triggering a systemic financial crisis.Therefore,based on existing economic theories,this article sorts out and analyzes the cross-market and cross-domain risk spillover of financial stress.Firstly,representative indicators are selected from the financial sub-markets,namely the bond,stock,currency,and foreign exchange markets,to construct China’s financial sub-market stress index,and the stress conditions of China’s sub-financial markets are analyzed.Next,the DY and BK models are used to empirically analyze the risk spillover between China’s financial markets.Finally,the dynamic correlation coefficient method is used to construct China’s financial stress index,and the Markov regime-switching model is used to identify China’s financial risk situation.The research results show that: Firstly,the financial sub-market stress index constructed in this article can effectively reflect local stress events to meet the monitoring of local market risks.Secondly,in terms of static risk spillover analysis,the risk spillover intensity between China’s markets is not significant,and the risk spillover mainly comes from low-frequency events,indicating that there are certain barriers between China’s financial sub-markets,and the risk preferences of market participants have significant differences.In terms of dynamic risk spillover analysis,the overall average spillover level in China is 27.31%,also mainly from lowfrequency events.There is a significant bidirectional spillover effect in China’s financial submarkets,but the spillover degree is not symmetrical.Overall,the stock market mainly acts as a receiver of risk spillover,while the bond market mainly acts as a sender of risk spillover.Thirdly,the financial stress index synthesized based on dynamic correlation coefficient can reflect the overall stress level of the financial market well.The empirical results also show that China’s financial market is mostly in a state of low to medium stress,and the probability of transitioning to a high stress state is quite low,and the duration is not long.