Macroeconomic perspective on constructing financial vulnerability indicator in China

Macroeconomic perspective on constructing financial vulnerability indicator in China

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This Adapters paper attempts to develop a financial vulnerability indicator for China as a barometer for the state of financial vulnerability in the Chinese financial market, possibly for real-time application.Twelve variables from different sectors are utilised to extract a common vulnerability component using a dynamic approximate factor model.Through the implementation of a Markovswitching Bayesian vector autoregression (MSBVAR) model, the empirical results indicate that a Outdoor Dining Room Set high-vulnerability episode is associated with substantially lower economic activity, but a low-vulnerability episode does not incur substantial changes in economic activity.Notably, the constructed indicator can serve as a real-time early warning system to signify vulnerabilities in the Chinese financial market.First published online 20 November 2020.