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Modelling the impact of aggregate financial shocks external to the Chinese economy

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  • Qin, Duo
  • He, Xinhua

Abstract

Ways of extracting financial condition indices (FCI) are explored and alternative FCIs external to the Chinese economy are constructed to model their predictive content. The exploration aims at highlighting the rich and varied dynamic features of financial variables underlying FCIs and the importance of synchronising dynamic information between FCIs and the real-sector variables to be forecasted. The modelling experiment aims at improving the forecasting model upon which the FCIs are assessed. Four variables are chosen as the likely macro channel of the FCIs affecting the Chinese economy. It is found that the FCI-led models enjoy forecasting advantages over a benchmark model in three out of the four variables, although the benchmark model is not dominated by the FCI-led models when judged by in-sample encompassing tests. The evidence indicates the increasing exposure of the Chinese economy to the global financial conditions.

Suggested Citation

  • Qin, Duo & He, Xinhua, 2012. "Modelling the impact of aggregate financial shocks external to the Chinese economy," BOFIT Discussion Papers 25/2012, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:bdp2012_025
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    References listed on IDEAS

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    More about this item

    Keywords

    financial index; dynamic factor; VAR; error correction; encompassing;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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