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Systemic Risk and Financial Fragility in the Chinese Economy: A Dynamic Factor Model Approach

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  • Alexey Vasilenko

    (Bank of Russia, Russian Federation;National Research University Higher School of Economics, Laboratory for Macroeconomic Analysis.)

Abstract

This paper studies systemic risk and financial fragility in the Chinese economy, applying the dynamic factor model approach. First, we estimate a dynamic factor model to forecast systemic risk that exhibits significant out-of-sample forecasting power, taking into account the effect of several macroeconomic factors on systemic risk, such as economic growth slowdown, large corporate debt, rise of shadow banking, and real estate market slowdown. Second, we analyse the historical dynamics of financial fragility in the Chinese economy over the last ten years using factor-augmented quantile regressions. The results of the analysis demonstrate that the level of fragility in the Chinese financial system decreased after the Global Financial Crisis of 2007-2009, but has been gradually rising since 2015.

Suggested Citation

  • Alexey Vasilenko, 2018. "Systemic Risk and Financial Fragility in the Chinese Economy: A Dynamic Factor Model Approach," Bank of Russia Working Paper Series wps30, Bank of Russia.
    • Handle: RePEc:bkr:wpaper:wps30
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    References listed on IDEAS

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    More about this item

    Keywords

    systemic risk; financial fragility; factor model; quantile regressions; China .;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G2 - Financial Economics - - Financial Institutions and Services

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