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Measuring the instability of China's financial system: Indices construction and an early warning system

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  • Sun, Lixin
  • Huang, Yuqin

Abstract

In this paper, employing several econometric techniques, the authors construct a financial stress index (CNFSI) and a financial conditions index (CNFCI) to measure the instability of China's financial system. The indices are based on the monthly data collected from China's inter-bank markets, stock markets, foreign exchange markets and debt markets. Using these two indices, the authors identify the episodes of systemic financial stress, and then evaluate the indices. The empirical results suggest that the CNFSI performs better than the CNFCI. Furthermore, the authors propose four leading indicators for monitoring China's financial instability, and provide a primary early warning system for China's macroprudential regulations. Finally, they conduct a test to evaluate the predictive power of the CNFSI and the early warning system with reference to the 2015 episode. Their results suggest that both work well.

Suggested Citation

  • Sun, Lixin & Huang, Yuqin, 2016. "Measuring the instability of China's financial system: Indices construction and an early warning system," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-41.
    • Handle: RePEc:zbw:ifweej:201619
    DOI: 10.5018/economics-ejournal.ja.2016-19
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    Cited by:

    1. Ruoxi Zhang & Xue Li & Satish Chand, 2018. "An Early Warning Of An Impending Currency Crisis In China," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(05), pages 1101-1125, July.
    2. Ruoxi Zhang & Xue Li & Satish Chand, 2019. "An Early Warning Of An Impending Currency Crisis In China," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 64(05), pages 1101-1125, December.

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    More about this item

    Keywords

    financial stress index; financial conditions index; China's financial system; leading indicators; early warning system;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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