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Financial Stress in China and International Spillover

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Intelligent Systems and Applications (IntelliSys 2022)

Part of the book series: Lecture Notes in Networks and Systems ((LNNS,volume 543))

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Abstract

This paper proposes a novel financial stress index (FSI) of the Chinese economy that effectively identifies the recent major financial crises. Using the Chinese FSI, we analyze the international transmission between the financial stress in China and the US/euro area’s financial condition and stock market sentiment. We find that the Chinese FSI is informative in explaining the international spillover effects and the spillovers are stronger during crisis periods. While the international transmission of financial stress is mainly from US/euro area to China, the spillover effects during Chinese cash crunch and European sovereign debt crises particularly have the opposite direction of the international spillovers. Our evidence suggests that the spillovers from financial stress in China to euro area’s financial condition and stock market sentiment are attributed to their trade and financial linkages.

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Notes

  1. 1.

    Financial stress is regarded as a state of financial instability, namely, the amount of materialized systemic risk in an economy [1].

  2. 2.

    von Hagen et al. [35] and Chor and Manova [36] recognized the 2008 subprime crisis period from August 2007 to May 2009 and from August 2007 to October 2009, respectively. Albertazzi et al. [37] and Popov and van Horen [38] classified the periods from April 2010 to December 2011 and from July 2009 to December 2011 as the European sovereign debt crisis, respectively.

  3. 3.

    For instance, Merryl Lynch announced a loss of 8.4 billion USD on 24 October 2007, and Bear Stearns was sold for 2 USD per share to JP Morgan Chase to avoid bankruptcy on 16 March 2008. The share price of Bear Stearns was 145.48 USD an year ago.

  4. 4.

    The Federal Reserve Bank supplied 41 billion USD to banks at low interest rates on 1 November 2007, and this is the largest single bailout since the injection of 50 billion USD on 19 September 2011.

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Author information

Authors and Affiliations

  1. Evaluation Institute of Regional Public Corporation, Seoul, 06647, Republic of Korea

    Guseon Ji

  2. Desautels Faculty of Management, McGill Univeristy, Montréal, H3A 1G5, Canada

    Linxiao Cong

  3. Department of Industrial Engineering and Center for Finance and Technology, Yonsei University, Seoul, 03722, Republic of Korea

    Jinu Kim & Kwangwon Ahn

Authors
  1. Guseon Ji
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  2. Linxiao Cong
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  3. Jinu Kim
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  4. Kwangwon Ahn
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Corresponding author

Correspondence to Kwangwon Ahn .

Editor information

Editors and Affiliations

  1. Faculty of Science and Engineering, Saga University, Saga, Japan

    Kohei Arai

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Ji, G., Cong, L., Kim, J., Ahn, K. (2023). Financial Stress in China and International Spillover. In: Arai, K. (eds) Intelligent Systems and Applications. IntelliSys 2022. Lecture Notes in Networks and Systems, vol 543. Springer, Cham. https://doi.org/10.1007/978-3-031-16078-3_19

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