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Macroeconomic perspective on constructing financial vulnerability indicator in China

    Tai-Hock Kuek Affiliation
    ; Chin-Hong Puah Affiliation
    ; M. Affendy Arip Affiliation
    ; Muzafar Shah Habibullah Affiliation

Abstract

This 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 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

Keyword : financial vulnerability indicator, financial crises, early warning system, dynamic factor model, Markov-switching model, China

How to Cite
Kuek, T.-H., Puah, C.-H., Arip, M. A., & Habibullah, M. S. (2021). Macroeconomic perspective on constructing financial vulnerability indicator in China. Journal of Business Economics and Management, 22(1), 181-196. https://doi.org/10.3846/jbem.2020.13220
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Jan 27, 2021
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This work is licensed under a Creative Commons Attribution 4.0 International License.

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