Professor Zihui Yang from the College of Business at Southern University of Science and Technology (SUSTech) has recently published his findings on the direction and strength of the various influencing factors on systemic risk and its subcomponents under different market shocks, and analyzes the transmission channels of imported financial risks.
His research paper, entitled “Research on Influencing Factors and Transmission Channels of Systemic Risk under International Shocks,” has been published in Economic Research Journal, a top Chinese economic journal.
Worldwide panic has dramatically risen given the intertwining and intensifying risks of the global COVID-19 pandemic, frequent geopolitical conflicts, rate hikes and balance sheet runoff from advanced economies, alongside exacerbating overseas inflation. As a result, the uncertainty confronting China’s capital market has increased significantly in recent years. Meanwhile, the global economy has been pushed into slumps, and systemic risk spreads rapidly among financial markets, leading to increasing international risks.
Therefore, it has become a major challenge for financial regulators to defuse international risk shocks and fend off abnormal volatilities in the financial markets under the circumstances in which the global situation has become more grave and complex. At the same time, China persistently deepens the financial opening in the 14th Five-Year Plan period. Thus, it is academically valuable and practically significant to examine the contagion channels and influencing factors of systemic risk under international risk shocks.
Relevant literature indicates that, at a global level, risk shock propagates via informational channels and real linkage channels. This paper finds that throughout the contagion of global financial risks, the real linkage channel composed of trade and financial links is more important than the information channel dominated by investor fears. Growing trade and financial connections between economies would increase systemic risk.
This work employs extreme value theory to decompose systemic risk into systemic linkage and tail risk, and analyzes the driving factors of systemic risk based on macro- and micro-prudential perspectives. The result shows that the trade linkage has a significant driving effect on the tail risk accumulation of each market, while the financial channel is an important determinant of risk co-movements among different economies and global financial markets.
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