Research on the FinTech risk early warning based on the MS-VAR model: An empirical analysis in China

Abstract

FinTech can significantly improve the efficiency of financial services, improve the transparency of the financial system, and promote economic growth. However, as a “disruptive innovation,” it also brings more uncertainty and potential risks. In recent years, China's FinTech industry has achieved remarkable leapfrogging development, but due to the lag or absence of supervision, the hidden risks are prominent, which brings challenges to the existing financial stability. Based on the main participants and external environment of China's FinTech, we select 11 first-level indicators and 30 s-level indicators in five categories and use the principal component analysis (PCA) to construct a comprehensive stress index of Fintech risk that conforms to the actual characteristics of China. Based on monthly data from 2010 to 2021, we use the MS-VAR model and ARIMA model to empirically analyze and predict the risks of FinTech in China. Our result indicates that, in terms of duration, the low-to-medium risk state of China's FinTech persists for a relatively long time, with overall risks being controllable. From the perspective of external shocks, macroeconomic factors can influence financial risks, which in turn affect the size of FinTech risks. As for the development trend, in the next five years, China's FinTech will mainly remain in a low-to-medium risk state, with high-risk fluctuations only occurring in a few time periods. The research significance of this paper is reflected in the following aspects: First, this paper constructs a Fintech risk stress index that conforms to the actual characteristics of China and profoundly analyzes the risk level and future trend of China's Fintech, which is conducive to deepening the theoretical research on Fintech risk early warning; Secondly, the study of this paper is not only of great significance for promoting the benign development of Fintech in China, but also can provide beneficial schemes for other major countries to prevent Fintech risks and maintain financial stability.