Abstract
Based on monthly data of six major financial variables from January 1996 to December 2018, this paper employs a structural vector autoregressive model to synthesize financial conditions indices in China and the United States, investigates fluctuation characteristics and the synergy of financial volatility using a Markov regime switching model, and further analyzes the transmission paths of the financial risk by using threshold regression. The results show that there is an approximately three-year cycle in the financial fluctuations of both China and the United States, and such fluctuations have a distinct asymmetry. Two thresholds were applied (i.e., 0.361 and 0.583), taking the synergy index (SI) as the threshold variable. The impact of the trade factor is significant across all thresholds and is the basis of financial linkages. When the SI is less than 0.361, the exchange rate factor is the main cause of the financial cycle comovement change. As the financial volatility synergy increases, the asset factor and interest rate factor start to become the primary causes. When the level of synergy breaks through 0.583, the capital factor based on stock prices and house price is still the main path of financial market linkage and risk transmission, but the linkage of monetary policy shows a restraining effect on synergy. Therefore, it is necessary to monitor the financial cycle and pay attention to the coordination between countries in terms of policy regulation.
Highlights
In the context of rapid economic growth and stable inflation, both Japan in 1990 and the United States in 2007 experienced large-scale capital market crashes
By using the structural vector autoregressive (SVAR) model and the impulse response function to determine the weights of financial indicators, we synthesized the financial conditions indices (FCIs) of the two countries
Combined with the actual financial situation of the two countries, the two FCIs constructed in this paper can better reflect reality, so they offer a useful basis for analyzing the fluctuation of the financial cycle in the two countries
Summary
In the context of rapid economic growth and stable inflation, both Japan in 1990 and the United States in 2007 experienced large-scale capital market crashes. Severe credit contraction and shrinking asset prices triggered a long-term recession. The two crises made academics and policymakers aware that it is not sufficient to maintain economic sustainability without paying attention to financial market volatility [1,2]. The history of financial crises shows that most occur near the peak of the financial cycle. The correlation between economic cycle and financial volatility is becoming closer. A financial crisis is often accompanied by a recession, and the financial expansion period often leads to credit expansion and is accompanied by economic recovery [3]. It is difficult to reasonably explain the cyclical fluctuations of financial markets and to accurately capture the financial cycle changes [4]
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