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An Analysis of the Impacts of Extreme Financial Events on Systemic Risk——Evidence from China's Banking Sector
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TitleAn Analysis of the Impacts of Extreme Financial Events on Systemic Risk——Evidence from China's Banking Sector  
AuthorTang Wenjin and Su Fan  
OrganizationSchool of Finance, Zhongnan University of Economics and Law; 
Key WordsSystemic Risk; Extreme Financial Events; Macro-Jump-CCA; Mixed- Frequency Macro Dynamic Factor 
AbstractExtreme financial events are ignored by mainstream researches because they are usually taken as extremely low probability events or "black swan" events, and furthermore, it's quite difficult for traditional theories and models based on stationary stochastic process hypothesis to describe and analyze the phenomenon of sudden outbreak of risk. Our marginal contributions are as follows: (1) theoretically bringing the nonlinear mechanism of risk surge into consideration and improving the existing model to make it more close to the reality of extreme financial events; (2) methodologically exploring the feasibility of using the improved model to early warning systemic risk and verifying its advancements. The empirical results based on China's banking sector show that the paper replaces pure diffusion hypothesis in conventional contingent claims analyses (CCA) with jump diffusion hypothesis, thus better catch the risk surge characteristics of extreme financial events, and can detect systemic risk about 3~6 months ahead of traditional studies. Considering that the jump risk caused by extreme financial events is reflected not only in financial markets, the paper constructs macroeconomic dynamic factors based on information from both financial markets and macro-economy to improve forward reflective effects, hence a Macro-Jump-CCA model which is more applicable to early warning of systemic risk. Through our empirical analyses based on China's banking sector, we find that Macro-Jump-CCA can identify noise signals and reduce adverse effects, and therefore can provide 2~3 months for policy reaction to precautions against systemic risk even in condition of noise signals. 
Serial NumberWP1194 
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