Econometrics Method Applied to Macro-prudential Management Framework

• Published in: Journal of combinatorics, information & system sciences Vol. 45; no. 1-4; pp. 221 - 232
• Main Author: Wei, Yicheng
• Format: Journal Article
• Language: English
• Published: New Delhi Prints Publications Pvt. Ltd 01.01.2020
• Subjects: Blocking; COVID-19; Econometrics; Economic crisis; Impact analysis; Macroeconomics; Risk; Securities markets
• ISSN: 0250-9628; 0976-3473
• DOI: 10.32381/JCISS.2020.45.1-4.5

The spread of COVID-19 has triggered the biggest turmoil in global financial markets since 2008. Compared with the 2008 sub-prime crisis, the financial turmoil caused by the outbreak of COVID-19 demonstrates several new features. One is that spread of the fluctuation of financial markets are characterized by phases. In the first phase, the sudden close of the real economy triggered expectation of enterprises' debt default, thus caused collapse of debt and equity markets. In the second phase, the cut of equity and debt markets, especially high yield debt market, caused exogenous diffusions of risk within the financial system. Hereby, traditional monetary and fiscal instruments are temporarily ineffective in recognizing and blocking risks between financial markets. The lack of effective tools in the recent financial crisis caused by COVID-19 enhances the significance of research on the macro-prudential management, whereby the concept was first proposed in the 1980s. It focuses on the overall circumstance of the financial system and discusses the impact of global stability on macroeconomic performance. In this study, we attempt to construct a t-factor variation model to analyze the dynamic impact of the real economy on financial markets, thus expand the connotation of macroprudential management framework. The study first introduces methods to analyze interaction between the real economy system and financial system, by building a dynamic econometrics model analyzing the coefficient matrix through Lasso method under the B-spline approximation. Using the model, we are capable of identifying the fast switching risk transmission path, so as to create precise macroeconomic tools to block risk diffusions.